After seeing a series of defaults made by companies in payment of interest and principal amount even in case of secured debentures, almost every investor who has invested his hard-earned money in such debentures is worried and puzzled as to whether, investment in secured debentures is really secure? In order to improve the deteriorating condition, the Government has introduced some provisions in the Companies Act, 1956 (the Act) through the Companies (Amendment) Act, 2000 (the Amendment Act) which are expected to go a long way in protecting the interests of debenture-holders.
Who is a Debenture Trustee?
According to SEBI Rules, 1993- “debenture trustee” means a trustee of a trust deed for securing any issue of debentures of a body corporate [section 2 (bb)].
SECURITIES AND EXCHANGE BOARD OF INDIA (DEBENTURE TRUSTEES) REGULATIONS, 1993: These regulations may be called the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993. These regulations govern the registration and other provisions relating to Debenture Trustee.
Who regulates Debenture Trustee?
In India, Debenture Trustees are regulated by SEBI. The SEBI (Debenture Trustees) Regulations, 1993 govern the Debenture Trustees and provide for eligibility criteria for registration of Debenture Trustees, monitoring and review, registration, Code of Conduct, procedure of action in case of defaults, avoidance of conflict of interest and inspection of Debenture Trustees by SEBI, amongst other things. Public issues and issues proposed to be listed are covered under the said regulations.
RULES/ SECTION/ CIRCULAR:
Section 71(5):Provision of Debenture Trustee
Rule 18(2) of the Companies (Share Capital and Debentures) Rules, 2014
APPLICABILITY TO APPOINT DEBENTURE TRUSTEE:
In the following below mentioned situations Companies required to appoint Debenture Trustee:
- When company issue a prospectus or make an offer or invitation to the public
- When company make an offer or invitation to its members exceeding 500 (five hundred) for the subscription of its debentures.
WHO CAN BE APPOINTMENT AS DEBENTURE TRUSTEE?
In general to act as debenture trustee, the entity should either be a scheduled bank carrying on commercial activity, a public financial institution, an insurance company, or a body corporate. The entity should be registered with SEBI to act as a debenture trustee.
CONDITIONS FOR APPOINTMENT OF DEBENTURE TRUSTEE:
Rule 18(2)(a) (b) of the Companies (Share Capital and Debentures) Rules, 2014: states the conditions for appointment of debenture trustee.
- The names of the debenture trustees shall be stated in letter of offer inviting subscription for debentures, and
- The names of the debenture trustees shall be stated in all the subsequent notices or other communications sent to the debenture holders
- A statement regarding consent of debenture trustee shall appear in the letter of offer issued for inviting the subscription of the debentures
- A written consent shall be obtained from such debenture trustee or trustees proposed to be appointed
NON ELIGIBILITY TO APPOINT AS DEBENTURE TRUSTEE:
Rule 18(2)(c) of the Companies (Share Capital and Debentures) Rules, 2014: A person shall not be appointed as a debenture trustee, if he-
- beneficially holds shares in the company;
- is a 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 moneys which are to be paid by the company otherwise than as remuneration payable to the debenture trustee;
- is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company;
- has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon;
- has any pecuniary relationship with the company amounting to two per cent. or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;
- is relative of any promoter or any person who is in the employment of the company as a director or key managerial personnel
DUTIES OF DEBENTURE TRUSTEE:
The Debenture Trustee is an intermediary between the issuer of debentures and the holders of debentures. Accordingly the main responsibility of debenture trustee is to protect the interest of debenture holder.
Section 71(5) stated that- A debenture trustee shall take steps
- To protect the interests of the debenture- holders and
- To redress their grievances in accordance with such rules as may be prescribed
Rule 18(2) of the Companies (Share Capital and Debentures) Rules, 2014: It shall be the duty of every debenture trustee to-
- LOO:Satisfy him that the letter of offer does not contain any matter which is inconsistent with the terms of the issue of debentures or with the trust deed.
- Deed:satisfy himself that the covenants in the trust deed are not prejudicial to the interest of the debenture holders;
- Communication to Debenture Holders: Communicate promptly to the debenture holders defaults, if any, with regard to
- payment of interest or
- redemption of debentures and action taken by the trustee therefor;
- Toward debenture holder: Ensure that the company does not commit any breach of
- Creation of Security:
- Ensure the implementation of the conditions regarding creation of security for the debentures, if any.
- ensure that the assets of the company issuing debentures and of the guarantors, if any, are sufficient to discharge the interest and principal amount at all times and that such assets are free from any other encumbrances except those which are specifically agreed to by thedebenture holders
- do such acts as are necessary in the event the security becomes enforceable.
- Debenture Redemption Reserve: Ensure the implementation of the conditions regarding debenture redemption reserve
- Meeting: take steps to convene a meeting of the holders of debentures as and when such meeting is required to be held
- Redemption & conversion: ensure that the debentures have been converted or redeemed inaccordance with the terms of the issue of debentures.
- the terms of issueof debentures or covenants of the trust deed and
- take such reasonable stepsas may be necessary to remedy any such breach
- inform the debenture holders immediately of any breach of the terms ofissue of debentures or covenants of the trust deed
- perform such acts as are necessary for the protection of the interest of the debenture holders and do all other acts as are necessary in order toresolve the grievances of the debenture holders
- Appointment of Nominee Director: appoint a nominee director on the Board of the company in the event of-
- Two consecutive defaults in payment of interest to the debenture holders;or
- Default in creation of security for debentures; or
- Default in redemption of debentures.
- Other Duties:
- Call for periodical status or performance reports from the Company.
- Call for reports on the utilization of funds raised by the issue of debentures
CASUAL VACANCY AS DEBENTURE TRUSTEE:
Appointment of debenture trustee in case of casual vacancy will be filed by Board of Directors. (May be by meeting or by circular resolution) subject to following conditions:
- where such vacancy is caused by the resignation of the debenture trustee, the vacancy shall only be filled with the written consent ofthe majority of the debenture holders
If such casual vacancy continue in the meantime if there is any trustee or trustees they may act on vacated place as trustee.
CONDITION FOR CALLING OF MMEETING OF DEBENTURE HOLDERS:
Rule 18(5) of the Companies (Share Capital and Debentures) Rules, 2014: The meeting of all the debenture holders shall be convened by the debenture trustee on-
- Requisition in writing signed by debenture holders holding at least one-tenth in value of the debentures for the time being outstanding;
- The happening of any event, which constitutes a breach, default or which in the opinion of the debenture trustees affects the interest of the debenture holders
CCONTENTS OF THE DEBENTURE TRUSTEE AGREEMENT:
Below mentioned are some of the clauses which are to be included in the Debenture Trustee Agreement. They are;
b) Description of the Instrument,
c) Details of charged securities
i. nature of charge,
ii. examination of title,
iii. rank of the charge, i.e., whether first, second, or pari passu charge, etc.
iv. charging of future assets,
v. time limit for creation of charge,
vi. minimum security cover required,
vii. valuation of security,
viii. circumstances in which security becomes enforceable,
ix. method and preservation of secured property etc.
d) Events of default.
e) Rights of Debenture Trustee.
f) Obligations of the body corporate (i.e., Issuer of debentures).
Apart from the above, the Agreement will have to include the following provisions :
(i) Definition and Interpretation,
(ii) Appointment of Debenture trustee and its powers,
(iii) Remuneration of Debenture Trustee,
(iv) Appointment of debenture Trustee as Attorney,
(v) Negative pledge ie not to create additional encumbrances on the secured asset,
(vi) Description of Events of Default, which may arise due to Non-payment to debenture holders, breach of any undertaking, avoidance or repudiation, etc.
(vii) Notice of exercise of trustee powers,
(viii) Indemnity of trustee,
(ix) Retirement of trustee & appointment of new trustee,
(x) Reimbursement of expenses incurred by the trustee,
(xi) General covenants etc.
ROLE OF DEBENTURE TRUSTEE WITH RESPECT TO CREATION OR ENFORCING THE SECURITY:
Creation of security means mortgaging the property in favor of Debenture Trustee for the benefit of debenture holders.This is an incidence of ownership of property and creation of security has to be done by the owner of the property. However,the debenture holders are beneficiaries and they have no access to mortgaged property. The Debenture Trustee holds the secured property on behalf of issuer of security and for benefit of debenture holders. In the event of default by the issuer of security, the Debenture Trustee will have the power and authority to bring the secured property to sale following the procedure in the Transfer of Property Act and the proceeds of sale will have to be applied to redeem the debentures. This is one of the powers conferred on the Debenture Trustee by the SEBI Regulations. Effective use of this power is possible if this power is included in the Debenture Trustee Agreement and asuitable power of attorney is executed by the issuer of debentures in favor of Debenture Trustee. This document has to be executed as a trust deed and not as a Mortgage deed or bond.
PROCESS OF APPOINTMENT OF DEBENTURE TRUSTEE:
Work required to done before calling of Meeting:
- First check offer for subscription is for more than 500 persons or to public
- Identify the debenture trustee
- Obtain the consent of such debenture trustee.
Call Meeting of Board Director:
- Issue Notice of Board Meeting to all the directors of Company at least 7 days before the date of Board Meeting.
- Attach Agenda, Notes to Agenda and draft resolution of Board Meeting along with Notice.
- Approach the Debenture trustee.
Hold the Board Meeting:
- Check the quorum of Board Meeting.
- Pass Board Resolution for appointment of debenture trustee.
- Authorize a director/officer of Company to sing the debenture trustee agreement.
There is no need to file any form for appointment of Debenture Trustee.
Can a Debenture Trustee act for issue of debentures of an associate?
A debenture trustee cannot act for any issue of debentures of its associate or if it has lent and the loan is not yet fully repaid or is proposing to lend money to the body corporate.
Conclusion: The proper implementation of these measures will help in giving boost to the sagging confidence of investors in the debt market and now more and more investors will prefer to invest in the debt market if they perceive debentures as a safe and secure investment opportunity with decent return on investment. Hence, it will lead to the development of a healthy debt market in the Country.
Consent to be obtained before appointment.
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. The observations of the author are personal view and the authors do not take responsibility of the same and this cannot be quoted before any authority without the written consent of the author.