A debenture is one of the ways by which company raise fund at a fixed rate of interest keeping in view the interest of debenture holders. As the number of debenture holders is large it becomes difficult for the company to handle the matter relating to debenture holders, due to which the concept of debenture trustee emerges, debenture trustee is appointed by the issuer company to protect the interest of debenture holder and also act as a link between the issuer company and the debenture holders.
Businesses need a substantial amount of capital for expansion, development, operation, and to create profit. Capital means money invested in the business. The company generally raise fund by issuing share capital or borrowing from lenders. A debenture is one of the ways of borrowing from the lenders at a fixed rate of interest. Company may also borrow from the banks but it prefers to raise fund by issuing debenture because the terms and conditions and the rate of interest are fixed by the company which is not possible if company borrow fund from the bank. So, to ensure and protect the interest of those who buy debenture, the company will have to appoint a debenture trustee. To understand the concept of debenture trustee, we have to understand the concept of debenture and trustee.
A debenture is a loan taken by the company from the public by issuing debenture at a fixed rate of interest for a fixed period of time. The loan certificate is called debenture bond. It is a kind of bond. A person who purchases debenture is known as a debenture holder, and they become the creditor of the company and get a fixed rate of interest.
The term debenture is defined under Section 2 (30) of Companies Act, 2013 as-
“Debenture” includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not
Provided that- (a) the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; and
(b) such other instrument, as may be prescribed by the Central Government in consultation with Reserve Bank of India, issued by a company, shall not be treated as debenture;
A trustee is a person who is trusted to make decisions in the beneficiary’s best interest. The trustee is totally responsible for the maintenance, performance, profitability of the trust under his guidance.
Debenture trustee is a person or agency appointed as a trustee to protect the interests of debenture holders and keep the company’s assets charged against debenture. The trustee serves as a liaison between the company and the debenture holder. When the debenture is issued to multiple debenture holders, it becomes difficult for the issuer company to resolve the grievances of all the debenture holders, to solve this problem the concept of debenture trustee was develop who handle the matter relating to debenture holder and also protect the interest of debenture holder.
Provisions regarding debenture trustee
A. Securities Exchange Board of India (Debenture Trustee) Regulation,1993.
The concept of debenture trustee was first time introduced in the Securities Exchange Board of India (Debenture Trustee) Regulation, 1993, which governs various regulations regarding registration, eligibility criteria, obligation, condition, consideration, rights, and duties which monitor and review the debenture trustee.
i) Section 2 (bb)
As per section 2 (bb) of the Regulations, debenture trustee means a trustee of a trust deed for securing any issue of debentures of a body corporate. (Applicable to the public company only)
ii) Who can apply for debenture trustee?
As per Regulation 7, the following entity registered with SEBI can apply for a trustee:
- A Scheduled Bank carrying on commercial activity; or
- Public Financial Institution; or
- Insurance Company; or
- A Body Corporate.
iii) Conditions for registration
Regulation 9A provides the necessary conditions for registration as a debenture trustee:
- Prior approval of the board is required.
- Registration fee should be paid in the manner specified in the regulations.
- During the period of registration capital adequacy requirement as mention under regulation 7A to be maintained all the time.
- To abide by regulations as specified under the Act.
iv) Board Consideration
Regulation 6 provides that board shall consider the application on the following points:
- Whether the applicant has the necessary infrastructure.
- Past experience.
- The Director or Principal officer is not convicted for any offense involving moral turpitude or not found guilty of any economic offense.
- Fit and proper person.
- Agency must have at least one person who has a professional qualification in law from any government recognized institution.
- Fulfils the capital adequacy requirements as specified in Regulation 7A.
v) Duties specified under regulation
A debenture trustee is bound to perform certain duties as mentioned under the regulation:
- Regulation 17 Maintenance of books of accounts
- Regulation 17A Appointment of compliance officers
- Regulation 18 Information to the Board
- Regulation 21 Obligation of Debenture Trustee on inspection by the Board.
B. Debenture Trustee under Companies Act, 2013
The concept of debenture trustee under Companies Act was introduced by the Companies (Amendment) Act, 2000, debenture trustees were appointed only for the public issue of debentures. Various provisions under this Act regulate the right, liability, and duties of debenture trustees.
Section 71 (5) Appointment of Debenture Trustee.
“No company shall issue a prospectus or make an offer or invitation to the public or to its members exceeding five hundred for the subscription of its debentures, unless the company has, before such issue or offer, appointed one or more debenture trustees and the conditions governing the appointment of such trustees shall be such as may be prescribed.”
Rule 18 (2) of the Companies (Share Capital and Debenture Rules), 2014, Conditions of appointment.
The company shall appoint debenture trustees under sub-section (5) of section 71, after complying with the following conditions, namely:
- in the letter of offer of debenture the name of the debenture trustee shall be specified, on any notice or communication issued to debenture holders the name of the trustee shall be mentioned;
- the company shall obtain a written consent from the trustee before they are appointed;
- a person shall not be appointed as a debenture trustee if he-
- holds a beneficiary share in the company;
- is promoter, director or key managerial personnel or any other officer or an employee of the company or its holding, subsidiary or associate company;
- is beneficially entitled to any money paid by the company other than remuneration payable to them;
- is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company;
- has given any guarantee for the debts secured by debentures or its interest;
- is relative of the promoter or other person in the company
- has any pecuniary relation with the company, during two years preceding the financial years or during the current financial years [ the amount should be lower of 2% of turnover or total income OR Rs. 50lac]
- the Board may fill any casual vacancy in the office of the trustee but while any such vacancy continues, the remaining trustee or trustees, if any, may act;
Provided that where such vacancy is caused by the resignation of the debenture trustee, the vacancy shall only be filled with the written consent of the majority of the debenture holders.
- any debenture trustee may be removed from office before the expiry of his term only if it is approved by the holders of not less three fourth in value of the debentures outstanding, at their meeting.
Rule 18(3) of the Companies (Share Capital and Debenture Rules), 2014, duties of debenture trustee.
- to protect or safeguard the interest of debenture holder;
- they shall redress the grievances of debenture holder;
- the matter in the letter of offer should not be inconsistent with the terms of issue of debenture or trust deeds;
- covenants of trust deed should not be prejudicial to the interest of debenture holders;
- demand periodical status and performance reports from the company;
- defaults payment of interest or redemption of debenture shall be communicated to debenture holders;
- take necessary steps to convene a meeting of debenture holders;
- ensure that debentures have been converted or redeemed as per the terms of the issue;
- ensure that there is no breach of terms of issue of debentures by the company;
- to appoint a nominee director in the Board of the company if:
- two consecutive defaults are made in the payment of interest
- default is made in creating security for debentures
- defaults are made in redemption of debentures.
- call for necessary reports as to how the funds raised by the issue of debentures are utilized;
- to perform necessary acts when the security on debentures becomes enforceable.
In Baroda Rayon Corporation v. ICICI Ltd. (Debenture Trustees), the right of debenture trustee to sell off a unit of Baroda Rayon for the benefits of debenture holders was upheld by the Court.
In Canara Bank (Debenture Trustees) v. Apple Finance Ltd., the Court upheld the right of debenture trustee i.e Canara Bank to sell the immovable property which is mortgaged by the company to secured the debenture, in the interest of debenture holder as the Apple Finance Ltd. fails to redeem the debenture and pay off the various loans granted by the debenture holders.
Debenture trustee plays a very important role, as it regulates and protects the interest of debenture holders. The debenture issuer company has to appoint the debenture trustee carefully as per the rules and regulations mentioned under the Securities Exchange Board of India (Debenture Trustee) Regulation, 1993 and also as per the rules mention under Companies (Share Capital and Debenture Rules), 2014. Hence, for the smooth functioning and protecting the interest of debenture holder the appointment of debenture holder is compulsory.
Question 1: What is a debenture?
Question 2: Who is a debenture trustee?
Question 3: Who can be appointed as a debenture trustee?
Question 4: What are the conditions for the appointment of a debenture trustee?
Question 5: What are the duties of debenture trustees?