SEBI Circular Addresses Appointment of Nominee Director by Debenture Trustees

In the discussed circular, SEBI has addressed the pivotal role of debenture trustees in ensuring effective oversight and representation on the boards of issuers.

Companies should amend their Articles of Association

Central to this circular lies Regulation 23(6) of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021.

Regulation 23(6) requires the companies governed by the Companies Act, 2013 to amend their Articles of Association, mandating the appointment of a director nominated by the debenture trustee(s).

Others should submit an affidavit

However, SEBI acknowledges the diverse landscape of issuers operating under different statutes and regulatory frameworks. Recognizing the challenges faced by these entities, the circular provides a pragmatic solution to ensure compliance while respecting the unique circumstances of each issuer.

For issuers that are not companies under the Companies Act, 2013, or those governed by statutes that do not explicitly provide for the appointment of nominee directors, SEBI has introduced a flexible approach. These issuers are required to submit an undertaking to their debenture trustee(s), committing to designate a non-executive, independent director, trustee, or member of the governing body as a nominee director for the purposes of Regulation 23(6).

The designation process

This designation process shall be carried out in consultation with the debenture trustee(s), ensuring that the interests of debenture holders are adequately represented. In cases where multiple debenture trustees are involved, the consultation process shall involve all trustees, fostering a collaborative and inclusive approach.

Role of debenture trustees

The circular further emphasizes the pivotal role of debenture trustees in ensuring compliance and monitoring issuer adherence to the prescribed guidelines. Debenture trustees are tasked with overseeing the implementation of this directive, ensuring that issuers fulfill their obligations and uphold the principles of transparency and investor protection.

By acknowledging the diverse regulatory landscapes and providing a flexible solution, SEBI has demonstrated its commitment to fostering a robust and inclusive securities market. This circular not only strengthens the oversight mechanisms but also promotes a culture of accountability and investor confidence, paving the way for a more resilient and dynamic financial ecosystem.

FAQs

Q1: Why is the appointment of a nominee director by debenture trustees significant?

A1: The appointment of a nominee director by debenture trustees is crucial as it ensures effective representation and oversight of debenture holders' interests on the boards of issuers. This measure aims to enhance transparency, accountability, and investor protection within the corporate governance framework.

Q2: What is the rationale behind SEBI's flexible approach for issuers governed by different statutes?

A2: SEBI recognizes that issuers may be governed by diverse statutes and regulatory frameworks, some of which may not explicitly provide for the appointment of nominee directors. To address this challenge, SEBI has introduced a flexible approach, allowing issuers to designate alternative representatives, such as non-executive or independent directors, trustees, or members of the governing body, as nominee directors in consultation with debenture trustees.

Q3: How does the consultation process work for issuers with multiple debenture trustees?

A3: In cases where an issuer has multiple debenture trustees, the consultation process for designating a nominee director shall involve all the debenture trustees. This collaborative approach ensures that the interests of all debenture holders are adequately represented and considered.

Q4: What is the role of debenture trustees in ensuring compliance with this circular?

A4: Debenture trustees play a crucial role in ensuring compliance with the provisions of this circular. They are responsible for monitoring and ensuring that issuers adhere to the guidelines outlined in the circular, including the appointment or designation of nominee directors. Debenture trustees act as guardians, safeguarding the interests of debenture holders and promoting transparency in the securities market.

Q5: How does this circular contribute to the development and regulation of the securities market?

A5: This circular is a significant step towards protecting the interests of investors in securities and promoting the development and regulation of the securities market. By strengthening the oversight mechanisms and fostering accountability within the corporate governance framework, SEBI aims to enhance investor confidence and create a more robust and transparent financial ecosystem.

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Here's the verbatim SEBI Circular:

Securities and Exchange Board of India

Circular No. SEBI/HO/DDHS/POD1/P/CIR/2023/112 Dated: July 04, 2023

To,

Issuers who have listed and/ or propose to list debt securities; and All Debenture Trustees registered with SEBI

Madam / Sir

Sub: Appointment of Director nominated by the Debenture Trustee on boards of issuers

1. Regulation 23(6) of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS Regulations) obligates an issuer which is a company under the Companies Act, 2013 to ensure that its Articles of Association requires its Board of Directors to appoint as director, the person nominated by the debenture trustee(s) in terms of clause (e) of sub-regulation (1) of regulation 15 of the SEBI (Debenture Trustees) Regulations, 1993 {1}.

2. While this obligation exists for issuers that are companies under the Companies Act, 2013, there is no similar obligation for issuers that are not companies. In this regard, representations have been received from Debenture Trustees. A gist of the representations, as follows, merit attention:

2.1. Issuers that are incorporated under different statutes / are also under the purview of other regulators have expressed inability to execute such amendments as the composition of their boards is governed by certain statutes which do not provide for appointment of nominee directors by Trustees.

2.2. Appointment of any director on the boards of certain issuers which are governed by certain statutes requires prior approval of the President of India.

2.3. Certain issuers are unable to appoint Nominee Directors on their boards as their principal document / charter does not provide for the same; in a few cases, the absence of a statutory mandate fetters them from amending their principal document.

3. The appointment of a director including nominee director is driven by the provisions of the principal document of the entity (Articles of association, in case of companies under the Companies Act, 2013). A nominee director is a director, and therefore, except for specific provisions of law, articles or the terms of the agreement under which the right of nomination comes, the position, appointment process, responsibilities, etc., of the nominee director are the same as that of any other director on the Board.

4. Accordingly, owing to the issues mentioned in para 2 and similarities in roles and responsibilities of the directors as mentioned in para 3, issuers that fall in any of the categories mentioned in 2.1, 2.2 or 2.3 above shall submit an undertaking to their Debenture Trustees that in case of events as mentioned in Regulation 15(1)(e) of SEBI (Debenture Trustees) Regulations, 1993, a non-executive / independent director / trustee / member of its governing body shall be designated as nominee director for the purposes of Regulation 23(6) of NCS Regulations, in consultation with the Debenture Trustee, or, in case of multiple Debenture Trustees, in consultation with all the Debenture Trustees.

5. Debenture Trustees shall:

5.1. ensure compliance with the provisions of this circular; and

5.2. monitor and ensure compliance by issuers, with the provisions of this circular.

6. The circular shall come into force with immediate effect.

7. Provisions of this circular shall be appropriately incorporated in the NCS Operational Circular dated August 10, 2021 and the DT Operational Circular dated March 31, 2023.

8. This circular is issued in exercise of the powers conferred upon SEBI under Section 11 (1) of the Securities and Exchange Board of India Act, 1992 read with the provisions of Regulation 2A of the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993 and regulations 55 and 56 of the Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations, 2021 to protect the interest of investors in securities and to promote the development of, and to regulate, the securities market.

9. This circular is available on SEBI website at www.sebi.gov.in under the categories “Lega Framework” and “Circulars.

Yours faithfully,

Pradeep Ramakrishnan

General Manager

Department of Debt and Hybrid Securities

Email: pradeepr@sebi.gov.in

Phone no. 022-26449246