Debenture Trustee

Debenture Trustee is a liaison between the issuer company and the debenture holders, who hold the secured property on behalf of the issuer company, which is mortgaged in favor of debenture trustee for protecting the interest of debenture holders.

1. 1. Who is a debenture trustee?

   A debenture trustee is an entity that holds the property of NCD Issuer Company for the benefit of the debenture holders. They are SEBI regulated entities designed for better investor protection and reducing the events of defaults by financial institutions issuing NCDs to the public.

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2. 2. Why debenture trustee is required?

   A debenture trustee is required to assist the issuer company to oversee the end- to- end NCD issue process from offer letter till settlement of debts. The concept of debenture trustee came into existence due to the difficulties faced by the issuer company to single-handedly deal with each debenture holder for various matters leading to inefficiency in the NCD issue process and an increase in defaults.

   Hence was felt the need for a single point of contact who can act as a link between the issuer company and debenture holder for the smooth functioning of the process and protecting the interest of the debenture holders.

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3. 3. What is the role of a debenture trustee?

   A debenture trustee plays an important role in NCD public issues. Here are some of the roles and responsibilities:

   • Calls for periodic reports from the issuer company to check if everything is under control.
   • Takes possession of the trust property as per the provisions of the trust deed.
   • In case of default, move to assets of the company to fulfil the debt obligation thereby protecting the interest of the debenture holders.
   • To ensure at all times that the property charged to debentures is free any other claims other than to fulfil the debenture holder obligations.
   • To exercise due diligence on the issuer company.
   • In case of any breach, a debenture trustee should at once take steps for protecting the interest of debenture holders.
   • To keep a track that the debenture conversion or redemption is done as agreed as per the offer.
   • To inform the board of any breach.
   • To appoint a nominee director on board of the issuer company.

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4. 4. Who can be appointed as debenture trustee?

   Any of the following who is registered with SEBI as a debenture trustee can be appointed as a debenture trustee:

   • A scheduled bank carrying on commercial activity;
   • A public financial institution;
   • An insurance company; or
   • A body corporate.

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5. 5. Who appoints a debenture trustee?

   A debenture trustee is appointed by the issuer company. They are SEBI registered and regulated entities. They work for better investor protection and reducing the events of defaults by financial institutions.

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6. 6. Who can be a debenture trustee?

   Anyone who fulfils the below criteria can apply for debenture trustee registration with SEBI for their consideration:

   • Has necessary infrastructure like adequate office space, equipment and manpower to effectively discharge his duties.
   • Has in his employment minimum of two persons with experience relevant to debenture trustee and at least one person who possesses professional qualification in law
   • Is a fit and proper person i.e. having financial integrity, competence, good reputation and character, efficiency and honesty and has no convictions, civil liabilities or any disqualifications to act as an intermediary.
   • Fulfils the capital adequacy requirement of net worth not less than one crore rupees.
   • The applicant should either be:
     1. A scheduled bank carrying on commercial activity;
     2. A public financial institution;
     3. An insurance company; or
     4. A body corporate.

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7. 7. What is a debenture trustee?

   Debenture trustee is an entity that is appointed by the issuer company before offering debentures for public subscription. The debenture trustee enters into an agreement with the issuer company by signing Debenture Trust Deed to protect the interest of debenture holders.

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8. 8. What does a debenture trustee do?

   A debenture trustee enters into an agreement with the issuer company and thereby takes on the important responsibility of safeguarding the interest of the debenture holders.

   A debenture trustee keeps a track of issuer company actions to ensure that all the conditions mentioned in the offer are adhered to and debenture holder obligations are met. In case of default by the issuer company, the debenture trustee moves to property that is mortgaged in favour of debenture trustee for benefit of the debenture holders and paying their dues.

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9. 9. What is the work of a debenture trustee?

   The most important work of a debenture trustee is to protect the interest of the debenture holders. The debenture trustee assists the issuer company in issuance and distribution of the debentures. The debenture trustee needs to keep a constant check on the issuer company doings to ensure that the conditions laid in the offer are met. In case of any default by the issuer company, the Debenture trustee has the power and authority to sell the secured property and use the proceeds to meet the debenture holder obligations.

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10. 10. What are the duties of debenture trustees?

    A debenture trustee has various duties to perform viz.

    1. To ensure there is no breach in terms of the issue of debentures.
    2. To ensure that all conditions regarding the creation of debentures are met.
    3. To take the required steps to meet debenture holder obligations in case of a breach.
    4. To ensure that the debentures are converted or redeemed as per the terms of the offer.
    5. To convene a meeting between the issuer company and debenture holders.
    6. To resolve disputes between issuer company and debenture holders.
    7. To take necessary steps to ensure the interest of debenture holders is protected at all times.

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11. 11. How to appoint a debenture trustee?

    The issuer company finalizes a debenture trustee who is registered with SEBI as a debenture trustee. The company calls for a Board meeting in which they enter into an agreement with the debenture trustee confirming their appointment and displaying their names in the letter of offer inviting subscription of debentures.

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12. 12. How to be a debenture trustee?

    To be a debenture trustee, one has to apply with SEBI for Debenture trustee registration. Various factors mentioned below are considered by SEBI before granting the registration certificate.

    • Has necessary infrastructure like adequate office space, equipment and manpower to effectively discharge his duties.
    • Has in his employment minimum of two persons with experience relevant to debenture trustee and at least one person who possesses professional qualification in law
    • Is a fit and proper person i.e. having financial integrity, competence, good reputation and character, efficiency and honesty and has no convictions, civil liabilities or any disqualifications to act as an intermediary.
    • Fulfils the capital adequacy requirement of net worth not less than one crore rupees.
    • The applicant should either be:
      1. A scheduled bank carrying on commercial activity;
      2. A public financial institution;
      3. An insurance company; or
      4. A body corporate

    On receiving the registration certificate, the entity can be appointed as a debenture trustee by an issuer company by entering into an agreement called Debenture Trustee deed.

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13. 13. When is a debenture trustee appointed?

    A debenture trustee is appointed before issuing a prospectus and offering the debentures to the public for subscription. As per the companies act, it is mandatory to appoint a debenture trustee for every issue where the debentures/bonds are beyond 18 months of maturity. For debentures/bonds with a maturity of 18 months and less, are exempted from the requirement of debenture trustee appointment.

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14. 14. Can an individual be a debenture trustee?

    No. To be a debenture trustee, it has to be one of the following.

    • A scheduled bank carrying on commercial activity;
    • A public financial institution;
    • An insurance company; or
    • A body corporate

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15. 15. What is meant by debenture trustee?

    A debenture trustee is an entity between the issuer company and the debenture holders appointed by the issuer company to safeguard the interest of the debenture holders.

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16. 16. Who can become a debenture trustee?

    Anyone who fulfils the below criteria can apply to become debenture trustee with SEBI for their consideration:

    • Has necessary infrastructure like adequate office space, equipment and manpower to effectively discharge his duties.
    • Has in his employment minimum of two persons with experience relevant to debenture trustee and at least one person who possesses professional qualification in law
    • Is a fit and proper person i.e. having financial integrity, competence, good reputation and character, efficiency and honesty and has no convictions, civil liabilities or any disqualifications to act as an intermediary.
    • Fulfils the capital adequacy requirement of net worth not less than one crore rupees.

    The applicant should either be:

    1. A scheduled bank carrying on commercial activity;
    2. A public financial institution;
    3. An insurance company; or
    4. A body corporate

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