Demystifying the Role of Debenture Trustees: A Comprehensive Guide

Q: What is a debenture, and why is it important? A: A debenture is a debt instrument issued by a company, acknowledging its obligation to repay the principal amount with interest at a specified rate. It serves as a method for companies to raise loan capital, distinct from share capital. Debentures play a crucial role in a company's capital structure and financing activities. Q: Who is a debenture trustee, and what are their primary responsibilities? A: A debenture trustee is an entity appointed to act as a trustee for securing the interests of debenture holders. Their primary responsibilities include monitoring the issuer's compliance with the terms of the debenture issue, enforcing security in the event of default, and taking necessary actions to protect the rights of debenture holders. Q: What are the eligibility criteria for an entity to be appointed as a debenture trustee? A: To act as a debenture trustee, the entity must be either a scheduled bank engaged in commercial activities, a public financial institution, an insurance company, or a body corporate. Additionally, the entity must be registered with the Securities and Exchange Board of India (SEBI) specifically for the purpose of acting as a debenture trustee. Q: How can an entity apply for registration as a debenture trustee with SEBI? A: To apply for registration, the applicant must submit Form A along with the Additional Information Sheet (AIS) to the designated SEBI office, accompanied by a non-refundable application fee of Rs. 50,000. The application process involves scrutiny by SEBI, and upon approval, the applicant must pay an initial registration fee of Rs. 20,00,000 for a validity period of five years. Q: What are the key duties and responsibilities of a debenture trustee? A: The primary duties of a debenture trustee include: - Periodically obtaining reports from the issuer company - Taking possession of trust property in accordance with the trust deed - Enforcing security in the interest of debenture holders - Ensuring the adequacy and availability of charged property to discharge interest and principal payments - Exercising due diligence to ensure compliance with applicable laws and regulations - Taking appropriate measures to protect debenture holders' interests in case of any breach - Ascertaining the proper conversion or redemption of debentures - Informing SEBI of any breach of the trust deed or provisions of law - Appointing a nominee director on the issuer's board, if required Q: Under what circumstances can a debenture trustee appoint a nominee director on the issuer's board? A: A debenture trustee can appoint a nominee director in the event of two consecutive defaults in interest payments to debenture holders, default in creating security for debentures, or default in the redemption of debentures. Q: Can a debenture issue be transferred, and when can a debenture trustee relinquish their assignment? A: Yes, a debenture issue can be transferred. A debenture trustee can relinquish their assignment for a particular debenture issue only when another debenture trustee is appointed in their place by the issuer company. Q: What are the essential components of a debenture trustee agreement? A: A debenture trustee agreement should include the following key components: - Preamble - Description of the instrument - Details of charged securities (nature of charge, examination of title, rank of charge, charging of future assets, time limit for creation of charge, minimum security cover, valuation of security, circumstances for enforceability, and method of preservation) - Events of default - Rights of the debenture trustee - Obligations of the issuer company - Definitions and interpretations - Appointment and powers of the debenture trustee - Remuneration of the debenture trustee - Appointment of the debenture trustee as an attorney - Negative pledge (not to create additional encumbrances on secured assets) - Description of events of default (non-payment, breach of undertaking, avoidance, or repudiation) - Notice of exercise of trustee powers - Indemnity of the trustee - Retirement and appointment of a new trustee - Reimbursement of expenses incurred by the trustee - General covenants Q: What is the role of a debenture trustee concerning the creation and enforcement of security in a debenture issue? A: The creation of security involves mortgaging the property in favor of the debenture trustee for the benefit of debenture holders. While the issuer company is responsible for creating the security, the debenture trustee holds the secured property on behalf of the issuer and for the benefit of debenture holders. In the event of default, the debenture trustee has the power and authority to bring the secured property to sale following the procedure outlined in the Transfer of Property Act, and the proceeds from the sale will be used to redeem the debentures. Q: Is the appointment of a debenture trustee mandatory for all debenture issues? A: Yes, the appointment of a debenture trustee is mandatory for debenture issues with a maturity period exceeding 18 months, irrespective of whether the debentures are secured or unsecured. However, debentures or bonds with a maturity of 18 months or less are exempt from the requirement of appointing a trustee. Q: Who pays the debenture trustee for their services? A: In India, the issuer company pays the debenture trustee for their services. Q: Which regulatory body governs debenture trustees in India, and what are the relevant regulations? A: In India, debenture trustees are regulated by SEBI. The SEBI (Debenture Trustees) Regulations, 1993, govern the eligibility criteria, registration, monitoring, code of conduct, procedures for handling defaults, avoidance of conflicts of interest, and inspection of debenture trustees by SEBI, among other aspects. Q: Can a debenture trustee act for the debenture issue of an associate company or a company to which it has lent money? A: No, a debenture trustee cannot act for any debenture issue of its associate company or a company to which it has lent money and the loan is not yet fully repaid or is proposing to lend money. Q: Who is responsible for creating the Debenture Redemption Reserve? A: It is the obligation of the issuer company to create the Debenture Redemption Reserve as per the SEBI Disclosure and Investor Protection (DIP) guidelines and the SEBI (Debenture Trustees) Regulations, 1993. The debenture trustee must ensure that the issuer furnishes an auditor's certificate confirming the creation of the Debenture Redemption Reserve.