As per Section 2(30) of the Companies Act, 2013, ‘Debenture’ includes debenture stock, bonds, or any other instrument of a company evidencing a debt, whether constituting a charge on the company’s assets or not. Regulation 2(bb) of Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993, defines “debenture trustee” as a trustee appointed in respect of any issue of debentures of a body corporate. A debenture trustee who has obtained a Certificate of Registration Securities and Exchange Board of India (SEBI), on an application being made under Regulation 3 of Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993, is termed a SEBI-Registered Debenture Trustees. Debenture Trustees or DT are appointed to safeguard the interests of the Debenture Holders and ensure that the issuer complies with the terms of the debenture issuance. However, the question arises, “Whether a SEBI-Registered Debenture Trustee can act as a Direct Selling Agent (DSA)?”. That being said, it is crucial to understand what is meant by DSA. A Direct Selling Agent or DSA is a professional who promotes and sells products or services for a company or organization in exchange for a commission. When talking about the financial sector, DSAs work with banks and NBFCs to help customers apply for loans. The primary responsibility of DSA includes: finding potential customers and guiding them through the paperwork. Undoubtedly, the work of a DSA is completely different from that of a DT. Hence, it becomes crucial to understand, if a DT can also perform the work of DSA.
Regulation 13A of SEBI (Debenture Trustees) Regulations, 1993, provides for scenarios in which a SEBI-registered Debenture Trustee (DT) cannot be appointed as a DT to the issuances. However, the SEBI (Debenture Trustee) Regulations, 1993, explicitly do not provide restrictions for carrying out any other activities/ services by the DTs. Schedule III read along with Regulation 16 specifies the Code of Conduct for the debenture trustees, which inter-alia reads as under:
Clause 4: A Debenture Trustee shall at all times exercise due diligence, ensure proper care, and exercise independent professional judgment.
Clause 7: A Debenture Trustee shall avoid conflict of interest and make adequate disclosure of its interest.
Clause 9: A Debenture Trustee shall put in place a mechanism to resolve any conflict-of-interest situation that may arise in the conduct of its business or where any conflict of interest arises, shall take reasonable steps to resolve the same equitably.
Clause 10: A Debenture Trustee shall make appropriate disclosure to the client of its possible source or potential areas of conflict of duties and interest while acting as debenture trustee which would impair its ability to render fair, objective, and unbiased services.
Furthermore, Annexure XIII A of SEBI Master Circular dated May 16, 2024, specifies the format for the half-yearly compliance report, that inter-alia requires the DTs to certify the following:
No conflict of interest with other activities: The activities other than debenture trusteeship performed by Debenture Trustee are not in conflict with Debenture Trustee activities and appropriate systems and policies have been put in place to protect the interests of debenture holders.
Thus, in terms of the aforesaid provisions, Regulation 13A of SEBI (Debenture Trustees) Regulations, 1993 provides for scenarios in which a SEBI-registered Debenture Trustees (DT) cannot be appointed as a DT to the issuances. Further, SEBI reaffirms that the SEBI (Debenture Trustee) Regulations, 1993, explicitly do not provide restrictions for carrying out any other activities/ services by the DTs, however, Regulation 16 of SEBI (DT) Regulations, 1993, specifically advises the DTs to comply with the Code of Conduct, available in Schedule III. Additionally, as per Chapter XIII of the Master Circular dated May 16, 2024, DTs are required to report to SEBI on half yearly basis within 75 days of the end of each half-year, the details of other activities carried out by DTs including the type of activity, description of activity, etc. and have to ensure that the activities other than debenture trusteeship performed by them, are not in conflict with Debenture Trustee activities and appropriate systems and policies have been put in place to protect the interest of debenture holders.
That being said, it is safe to conclude stating that, a SEBI-Registered Debenture Trustee can act as a Direct Selling Agent, such that the activities other than debenture trusteeship performed by them, are not in conflict with Debenture Trustee activities.
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