The Securities and Exchange Board of India (SEBI) in its board meeting held on 26 April 2017  has approved the amendments to the SEBI (Debenture Trustee) Regulations, 1993(hereinafter referred to as “Regulations”)as proposed in the consultative paper issued on 16 February 2017.The consultative paper was placed on SEBI’s website and suggestions were invited.
The Companies acts, 2013, as well as the SEBI regulations, prescribe the framework pertaining to debenture trustees. This led to several overlaps and ambiguities. Thus with a view to address this issue, SEBI formed a task force comprising of SEBI officials and representatives of the debenture trustees to conform the Debenture Trustee Regulations with the Companies Act, 2013.
The Key amendments proposed by the task force are mentioned here under:-
1. Several provisions in the existing debenture trustees regulations have reference to Companies Act, 1956; thus in light of the new act i.e. Companies Act,2013 being implemented, these provisions have to be updated as per the new act. :-
The amendments are as mentioned here under:-
2. Persons prohibited from acting as a debenture trustee: –
Currently, the Regulations cast restrictions on associate of the company on acting as debenture trustees. However Clause 18 of the Companies (Share Capital and Debenture) Rules specifically prohibits certain persons from acting as debenture trustees. Thus to bring conformity between the above-mentioned provision it has been proposed that the probation mentioned in Clause 18 be incorporated in the debenture trustee regulations. These regulations state that no person shall not be appointed as a debenture trustee if he:-
The objective is to ensure that the Debenture Trustee appointed is impartial and no conflict of interest exists. Thus, this will help generate confidence among the debenture holders.
3. Obligation to be complied with before appointment as a debenture trustee :-
The following additional obligations have been proposed that have to be adhered with before the debenture trustee is appointed:-
The Debenture Trustee has been made accountable to ensure that the issuer duly follows the law and the debentures have been issued within the prescribed time frame.
4. SEBI has proposed more stringent obligation on debenture trustees: –
Not only have several duties mentioned in the Companies act, 2013 have been incorporated but also certain duties have been added to these regulations. The additional obligation of debenture trustee, inter alia, are:-
5. Deletion of schedule IV: –
Currently, both SEBI, as well as MCA, prescribes the contents of the trust deed. This leads to confusion and ambiguity. Thus with a view to resolve this conflict it has been proposed to delete schedule IV of the Debenture Trustee Regulations which deals with the contents of the trust deed. Thus only Form SH-12 under the Companies (Share Capital and Debentures) Rules 2014 will prescribe the contents. This amendment will make compliance for the issuer as well as the trustee more convenient.
6. Maintenance of books of accounts, records, and documents:–
To protect the interest of debenture holder, the debenture trustees shall be required to maintain records, books of accounts and other documents for a period of 5 years. This will further safeguard the interest of the debenture holders as it puts the onus on the debenture trustees.
7. Compliance officer to obtain a certificate:-
In order to be eligible to be appointed to oversee the workings of a debenture trustee, a compliance officer will now need to obtain a certificate from the National Institute of Securities Market (NISM) established by SEBI. The proposed amendment will help to ensure that the compliance officer has the required knowledge to undertake the duties that are to be bestowed upon him.
8. Debentures trustees’ liability in case of default: –
The liability of debenture trustees has been enhanced to further protect the interest of debenture holders. The scope of trustees’ liability has been widened to also include:-
In the case of default under the above provisions action will be taken against him under Securities and Exchange Board of India (Intermediaries) Regulations, 2008 which can result in the suspension and cancellation of the certificate of registration of the debenture trustee.
9. Unsecured Debentures to come under the ambit of the Debenture Trustee regulations: –
Currently, it is unclear whether unsecured debentures come under the ambit of the Regulations. Thus it is clarified in these amendments that unsecured debentures will also come under the preview of Debenture trustee regulations. Thus resolving the ambiguity that exists.
10. Certificate from the auditor: –
It has also been clarified that the debenture trustee has to obtain a certificate from the issuer’s statutory auditor pertaining to the utilization of proceeds. This will reaffirm that the monies raised through issue of are being utilized in an appropriate manner.
The proposed (now approved) amendments are aimed to align the debenture trustee regulations in accordance with the Companies Act, 2013.These amendments will clarify several ambiguities and simplify compliance requirements to be adhered by both the trustee as well as the issuing company. Furthermore, these amendments will ensure better oversight on the working of debenture trustees and thus will foster confidence in the debt securities market.
(Author is associated with Vinod Kothari & Company and can be reached at firstname.lastname@example.org)