Debenture
Section 2(30) of the Companies Act, 2013 defines the term ‘debenture’ as including debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not. The following are not treated as debenture-
- the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; and
- such other instrument, as may be prescribed by the Central Government in consultation with the Reserve Bank of India, issued by a company.
Debenture trustee
Regulation 2(bb) defines the expression ‘debenture trustee’ as a trustee appointed in respect of any issue of debentures of a body corporate. The debenture trustee is appointed to present and protect the interest of debenture/bond holders.
Eligibility for debenture trustee
The following are eligible to act as debenture trustee-
Capital requirement
The capital requirement for the Debenture Trustee shall not be less than the net worth of Rs. 10 crores.
Procedure for obtaining registration
An application by a debenture trustee for grant of a certificate registration shall be made to the Board in Form A. The Form A contains 2 parts. Part I of the form requires furnishing the following-
- General Information;
- Organization structure;
- Details of infrastructural facilities;
- Business Plan for 3 years;
- Financial information;
- Other information.
Part II of the form requires furnishing the following-
- Business information;
- Experience;
- Declaration.
The application shall be accompanied by a fee of Rs.50,000/-. The Board may require the applicant to furnish further information or clarification regarding matters which are relevant to a debenture trustee to consider the application for a grant of a certificate. The applicant or, its principal officer shall, if so required, appear before the Board for personal representation.
While considering the application for registration of Debenture Trustee the Board shall take into the following for its consideration as to whether the applicant-
- has the necessary infrastructure like adequate office space, equipments, and manpower to effectively discharge his activities;
- has any past experience as a debenture trustee or has in his employment minimum two persons who had the experience in matters which are relevant to a debenture trustee;
- any person, directly or indirectly connected with the applicant has not been granted registration by the Board under the Act; or
- has in his employment at least one person who possesses the professional qualification in law from an institution recognized by the Government; or
- any of its director or principal officer is or has at any time been convicted for any offence involving moral turpitude or has been found guilty of any economic offence ;
- is a fit and proper person;
- fulfills the capital adequacy requirements.
If the application is complete in all respects and confirmed to the instructions the Board shall grant a certificate of registration in Form B.
A debenture trustee who has been granted a certificate of registration shall pay fee of Rs.20 lakhs. The debenture trustee to keep its registration in force, shall pay fee of 9 lakhs every 3 years from the 6th year, from the date of grant of certificate of registration or from the date of grant of certificate of initial registration granted prior to the commencement of the Securities and Exchange Board of India (Change in Conditions of Registration of Certain Intermediaries) (Amendment) Regulations, 2016 i.e., 08.12.2016. The Board may, on sufficient cause being shown, permit the debenture trustee to pay such fees at any time before the expiry of six months from the date on which such fees become due.
Conditions for registration
The registration granted to a debenture trustee is subject to the following conditions-
- where debenture trustee proposes change in control, it shall obtain prior approval of the Board for continuing to act as such after the change;
- it shall pay the fees for registration, in the manner provided in these regulations;
- it shall take adequate steps for redressal of grievances of the investors within 21 calendar days of the date of the receipt of the complaint and keep the Board informed about the number, nature and other particulars of the complaints received and the manner in which such complaints have been redressed;
- it shall maintain capital adequacy requirements at all times;
- it shall abide by the regulations made under the Act in respect of the activities carried on by it as a debenture trustee.
- it shall immediately intimate the Board, details of changes that have taken place in the information that was submitted, while seeking registration.
Rejection of the application
Where an application for grant of a certificate of does not fulfill the requirements set out, the Board shall reject the application after giving an opportunity of being heard. The refusal to grant registration shall be communicated by the Board within 30 days of such refusal to the applicant stating therein the grounds on which the application has been rejected.
Any applicant may, being aggrieved by the decision of the Board apply within a period of 30 days from the date of receipt of such intimation, to the Board for, reconsideration of its decision. On receipt of the application, the Board shall reconsider its decision and communicate its findings thereon as soon as possible in writing to the applicant.
Debenture trustee not act for an associate
A person shall not be appointed as a debenture trustee, in case-
- is an associate of the body corporate;
- 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 2% or more of its gross turnover or total income or Rs.50 lakh 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;
- is likely to have conflict of interest in any other manner:
- wherever there is guarantee by the state / central government for the debentures issued.
- The debenture trustee has lent and the loan is not yet fully repaid or is proposing to lend money to the body corporate-
Obligation of Debenture Trustee
The Debenture Trustee shall enter into an agreement with the body corporate before opening the subscription list for the issue of debentures. Such agreement shall contain-
- an undertaking by the body corporate to comply with all regulations / provisions of Companies Act, 2013, guidelines of other regulatory authorities in respect of allotment of debentures till redemption;
- the time limit within which the security for the debentures shall be created or the agreement shall be executed in accordance with the Companies Act, 2013 or provisions as prescribed by any regulatory authority as applicable.
Every debenture trustee shall accept the trust deeds which shall contain the matters as specified in section 71 of Companies Act, 2013 and Form No. SH.12 specified under the Companies (Share Capital and Debentures) Rules, 2014. Such trust deed shall consist of two parts:
- Part A containing statutory/standard information pertaining to the debt issue;
- Part B containing details specific to the particular debt issue.
Dispute resolution
All claims, differences or disputes between a debenture trustee and a body corporate arising out of or in relation to the activities of the debenture trustee in the securities market shall be submitted to a resolution mechanism that includes mediation and/or conciliation and/or arbitration, in accordance with the procedure specified by the Board. No loss or damage or expenses incurred by the debenture trustee or the body corporate which has appointed the debenture trustee shall be met out of the trust property.
Grievance redressal mechanism
The debenture trustee shall redress investor grievances promptly within 21 calendar days from the date of receipt of the grievance and in such manner as may be specified by the Board. The Board may also recognize a body corporate for handling and monitoring the process of grievance redressal within such time and in such manner as may be specified.
Duties of Debenture Trustee
The Debenture Trustee shall perform the following functions-
- to satisfy itself that the prospectus or letter of offer does not contain any matter which is inconsistent with the terms of the issue of debentures or with the trust deed;
- to satisfy itself that the covenants in the trust deed are not prejudicial to the interest of the debenture holders;
- to call for periodical status/ performance reports from the issuer company within 7 days of the relevant board meeting or within 45 days of the respective quarter whichever is earlier;
- to 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 there for;
- to appoint a nominee director on the Board of the company;
- to ensure that the company does not commit any breach of the terms of issue of debentures or covenants of the trust deed 10[by monitoring the same in the manner specified by the Board] and take such reasonable steps as may be necessary to remedy any such breach;
- to inform the debenture holders immediately of any breach of the terms of issue of debentures or covenants of the trust deed;
- to ensure the implementation of the conditions regarding creation of security for the debentures, if any, debenture redemption reserve and recovery expense fund;
- to 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 the debenture holders;
- to ensure that the debentures have been converted or redeemed in accordance with the terms of the issue of debentures;
- to take possession of trust property in accordance with the provisions of the trust deed;
- to ascertain and satisfy that-
- the debenture certificate is to be issued after registration of charge, the debenture certificates have been dispatched by the body corporate to the debenture holders within 30 days of the registration of the charge with the Registrar of Companies;
- debenture certificates have been dispatched to the debenture holders or debentures have been credited in the demat accounts of the debenture holders
- debenture certificates have been dispatched to the debenture holders or debentures have been credited in the demat accounts of the debenture holders;
- debenture holders have been paid the monies due to them on the date of redemption of the debentures;
- to exercise due diligence to ensure compliance by the body corporate, with the provisions of the applicable acts.
- To carry out the necessary due diligence and monitor the security cover in the manner as may be specified by the Board from time to time.
- To obtain a certificate from the statutory auditor of the issuer 13[regarding security cover] including compliance with the covenants of the Offer Document/Information Memorandum in the manner as may be specified by the Board from time to time
Maintenance of records
Every debenture trustee shall keep and maintain proper books of account, records and documents, relating to the trusteeship functions for a period of not less than five financial years from the date of redemption of debentures. It shall intimate to the Board, the place where the books of account, records and documents are maintained.
Compliance Officer
A debenture trustee shall appoint a compliance officer. He shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions, etc., issued by the Board or the Central Government and for redressal of investors’ grievances. The compliance officer shall report any non-compliance, of the requirements specified in the listing agreement with respect to debenture issues and debenture holders, by the body corporate to the Board.
Inspection
The Board is having right to inspect the books of Account and records of the Debenture Trustee for which the Board may appoint inspectors. The Board is also having right to investigate the affairs of the Debenture Trustee either by suo motu or on the basis of complaint received by it. The Board shall give a reasonable notice for the inspection. The Debenture Trustee and its officer shall allow the inspecting authorities to cause inspection. They have to extend all co-operations to the Inspecting authorities. The inspecting authority shall submit the report to the Board. The Board on receipt of report may take action as may deem fit.
Auditor
The Board may appoint a qualified auditor to investigate into the records of, or the affairs of, the debenture trustee. The auditor so appointed shall have the same powers of the inspecting authority.
Liability for default
A Debenture Trustee which-
- fails to comply with any conditions subject to which certificate has been granted;
- contravenes any of the provisions of the Act or these regulations;
- contravenes the provisions of the Companies Act or the rules made there under;
- fails to furnish any information relating to its activity as a Debenture Trustee as required by the Board;
- furnishes to the Board information which is false or misleading in any material particular;
- does not submit periodic returns or reports as required by the Board;
- does not co-operate in any enquiry, inspection or investigation conducted by the Board;
- fails to resolve the complaints of investors or fails to give a satisfactory reply to the Board in this behalf;
shall be dealt with in the manner provided under the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.
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