Taking a further step to secure the interest of customers, the capital market regulator has announced provisions regarding strengthening the role of debenture trustees providing them with the power to evaluate independently and oversee the asset cover in line with the interests of the consumers. It is to be noted that the decision has been taken after several defaults were observed in the debt market.
Therefore, to make it effective the SEBI has amended the norms related to Debenture Trustees and ILDS (Issue and Listing of Debt Securities Regulations) as per the notification. The new norms allow debenture trustees (DTs) to practice independent due diligence of the assets on which a charge is being secured.
They will have an enhanced role in securing the interest of customers in the following ways-
a. From now on, Debenture Trustees will exercise independent due diligence at the time of the creation of a charge on the security to warrant that such security is free from any prior interests or where it has, necessary permissions have been obtained from the charge-holders.
b. Further, they would be responsible to oversee the asset cover and acquire such a mandatory certificate from the statutory auditor on a half-yearly basis.
c. In addition, they will be responsible to take action by organizing the required meetings of debenture- holders for the enforcement of security, to join the inter-creditor agreement as specified by the Reserve Bank of India (RBI).
d. Further, the issuer company will maintain a recovery expense fund at the time of issuance of debt securities which may be applied for the purpose of taking legal action against the issuer company in the event of default and to enforce the security by the Debenture trustee.
The capital market regulator also provided that the issuer will provide an undertaking in the information memorandum stating “The assets on which a charge is created are free from any encumbrances and in cases, where the assets are already charged to secure a debt, the authorization to create a second charge on the assets of the issuer has also been acquired from the earlier creditor”.
Every debenture- trustee will accept the trust deeds consisting of two parts –
a. Part -A comprising of standard information pertaining to the debt-issue and
b. Part- B details related to the particular debt- issue;
Provisions Related to Debenture Trustee under Companies Act 2013-
The debenture Trustee is a liaison between the issuer company and the debenture holders, for the purpose of securing the interest of the debenture-holders by holding the secured property on behalf of the issuer company that is mortgaged in favor of the debenture trustee. Especially, in cases of Non-Convertible Debentures, the Debenture Trustee plays a significant role by the protection of the interest of debenture holders and performing the role of an intermediary between the issuer company and the debenture holders.
Under the Provisions of Companies Act 2013, it is mandatory for a company intending to issue debentures/bonds with a maturity period of more than 18 months to appoint a full-time Debenture Trustee, regardless of whether debentures/bonds are fully secured or not.
Nevertheless, the debentures/bonds with a maturity period of lesser than18 months or less are exempted from the obligation of appointing a debenture trustee.
Debenture Trustee Regulations SEBI-
The SEBI (Debenture Trustees) Regulation, 1993 governs the role, functions, and duties of Debenture Trustees and also provides for the eligibility criteria for the appointment of a Debenture Trustee along with required actions and procedure to be followed in case of a default in the issuer company.
For the purposes of acting as a Debenture Trustee, an entity should be any of the following-
i. A Scheduled bank engaged in carrying specific commercial activity/activities; or
ii. A public financial institution(PFI); or
iii. An insurance company; or
iv. A body corporate.
Further, the following needs to be observed during the appointment –
1. The entity intended to be appointed as a Debenture-Trustee must be registered with SEBI;
2. Such individual/ entity should be a separate and independent body from the issuer company and should not in any way associated with such.
3. The principal officer supervising the activities of the debenture- trustee should not in any way be-
a. A beneficial share owner of the issuer company, or
b. A promoter, director or key management personnel or employee of the issuer company or its holding, subsidiary or associate company.
Role and Responsibilities of a Debenture-Trustee –
a) Safeguarding the interests of the debenture-holders of the issuer company by acting as a liaison between the debenture-holders and the Company.
b) To call for records and maintain a periodical check on the reports of the issuer company.
c) To hold the possession of the trust property as per the provisions of the trust deed.
d) Taking suitable actions to guard the debenture-interests where the breach of any provisions of either the trust-deed or any regulatory provision has been committed.
e) Ensuring that the debentures have either been converted or redeemed as per the provisions and conditions under which they are offered to debenture holders.
f) Enforcing security in the interest of the debenture holders in case of any default by moving to assets for collection of debt.
g) Ensuring themselves at all times that the property charged is free from any encumbrances except those specifically agreed with the debenture holder and the property available is sufficient to satisfy the interests and the principal amount in relation to the debentures.
h) Exercising due diligence by ensuring that the issuer entity complies with all the applicable provisions of the Companies Act, the listing agreement of the stock exchange, or the trust deed, whichever applicable.
i) To take necessary actions in case of any breach of the trust deed or provision of law comes to his knowledge and taking appropriate legal action.
Thus, it is obvious that the role of a Debenture –Trustee is of a sign for the debentures and bond-holders of a company. Thus, enhancing their powers will allow better transparency and prevent chances of default by the issuer company against the interest of their customers.
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