FAQS RELATED TO DEBENTURES

1. What is a Debenture?

A debenture is a debt instrument issued by a company that serves as a formal acknowledgment of its obligation to repay the borrowed amount, along with a specified rate of interest, at a future date. Essentially, it is a method used by companies to raise funds through loan capital.

In simple terms, a debenture functions as a loan certificate or bond, which evidences the company’s liability to repay the lender or debenture holder. Unlike equity shares, which represent ownership in the company, debentures do not confer any ownership rights. Instead, they are a part of the company’s capital structure, classified as borrowed funds or debt capital, rather than share capital. The company issuing the debenture agrees to pay interest to the debenture holder periodically, typically at a fixed rate, until the principal amount is repaid.

2. Who is a Debenture Trustee?

A debenture trustee is an entity that acts as a fiduciary, representing and safeguarding the interests of debenture holders. This entity is responsible for overseeing and ensuring that the terms and conditions outlined in the debenture trust deed are adhered to by the issuing company. The trust deed is a legal document executed by the company issuing the debentures to secure the repayment of the debt. The debenture trustee’s primary role is to protect the rights and interests of the investors by monitoring the company’s financial health and compliance with the terms of the debenture issue.

3. Who Can Be Appointed as a Debenture Trustee?

To be eligible for appointment as a debenture trustee, an entity must meet specific criteria. The entity must belong to one of the following categories:

• A scheduled commercial bank involved in regular banking operations.
• A public financial institution that provides long-term finance for industrial development.
• An insurance company engaged in offering life or general insurance services.
• A body corporate that complies with regulatory requirements.

Additionally, the entity must be registered with the Securities and Exchange Board of India (SEBI) to act as a debenture trustee. SEBI ensures that the appointed trustee is capable of performing its duties effectively, such as monitoring the issuer’s compliance with the debenture terms and taking necessary actions to protect the interests of the debenture holders.

4. How to Apply for Registration as a Debenture Trustee?

To apply for registration as a Debenture Trustee with the Securities and Exchange Board of India (SEBI), the applicant must follow a structured process. The key steps involved are:

1. Payment of Application Fee:
   The applicant must pay a non-refundable application fee of ₹50,000. This fee must be paid via a demand draft, drawn in favor of ‘Securities and Exchange Board of India,’ and payable at Mumbai.
2. Submission of Application:
   The application must be submitted in Form A, accompanied by an Additional Information Sheet (AIS). Both Form A and the AIS are available on the SEBI website and can be accessed via the following link: SEBI Website – Debenture Trustee Application Forms.
3. Submission Address:
   Once completed, the application along with all required documents should be sent to the Division Chief at the following address:

Market Intermediaries Regulation and Supervision Department – 5
Securities and Exchange Board of India
SEBI Bhavan, 3rd Floor, A Wing
Plot No. C4-A, ‘G’ Block, Bandra-Kurla Complex
Bandra (E), Mumbai – 400 051

5. Is There a Registration Fee for Debenture Trustees?

Yes, applicants are required to pay fees for both initial registration and permanent registration as prescribed under the Debenture Trustee Regulations. The fee structure is as follows:

• Initial Registration Fee:

• Amount: ₹20,00,000
• Validity: 5 years from the date of issuance of the certificate
• Permanent Registration Fee:

• Amount: ₹9,00,000
• Payable after the completion of the initial 5-year registration period

6. Validity of the Certificate of Registration

The certificate of initial registration granted to a Debenture Trustee remains valid for a period of five years.

• If the Debenture Trustee wishes to continue operating after the initial period, they must apply for permanent registration.
• The application for permanent registration must be submitted to SEBI at least three months before the expiry of the initial registration.

Once the permanent registration is granted, the Debenture Trustee is required to pay a maintenance fee of ₹9,00,000 every three years to keep the registration active and valid. This ensures the registration remains in force and allows the Debenture Trustee to continue offering its services in compliance with SEBI regulations.

7. What is the Role of a Debenture Trustee?

The Debenture Trustee plays a critical role in protecting the interests of debenture holders. Their primary duties include:

1. Monitoring Periodic Reports:
   The trustee is responsible for regularly obtaining reports from the company (issuer of the debentures) to monitor its financial health and compliance with the terms of the debenture issue.
2. Managing Trust Property:
   The trustee takes possession of the assets or property designated as trust property in accordance with the provisions outlined in the trust deed.
3. Enforcing Security:
   If necessary, the trustee enforces the security in the best interest of the debenture holders, ensuring that their investment is protected.
4. Ensuring Adequacy of Security:
   The trustee ensures that the assets or property charged as security for the debentures are sufficient to cover the payment of interest and principal at all times. The trustee must also ensure that these assets remain free from any other encumbrances, unless specifically agreed upon.
5. Compliance and Due Diligence:
   It is the trustee’s duty to ensure that the issuing company complies with the provisions of the Companies Act, the listing agreement with stock exchanges, and the terms of the trust deed.
6. Protecting Debenture Holders’ Interests:
   The trustee must take appropriate action to safeguard the debenture holders’ interests if any breach of the trust deed or applicable laws is detected.
7. Monitoring Redemption and Conversion:
   The trustee ensures that the debentures are redeemed or converted as per the terms and conditions agreed upon with the debenture holders.
8. Reporting to SEBI:
   Any breach of the trust deed or legal provisions must be immediately reported to the Securities and Exchange Board of India (SEBI).
9. Appointing a Nominee Director:
   The trustee may appoint a nominee director on the board of the issuing company when specific conditions are met, as outlined below.

8. When Can a Nominee Director Be Appointed?

A Debenture Trustee can appoint a nominee director on the board of the issuing company under the following circumstances:

1. Two Consecutive Defaults:
   If the company fails to pay interest to debenture holders for two consecutive payment periods.
2. Failure to Create Security:
   If the company defaults in creating the security for the debenture issue, as stipulated in the trust deed.
3. Default in Redemption:
   If the company fails to redeem the debentures as per the agreed terms.

9. Can a Debenture Issue Be Transferred?

Yes, a debenture issue can be transferred. However, a Debenture Trustee may only relinquish its duties in relation to a debenture issue if another trustee is appointed to take its place. This ensures that the interests of the debenture holders continue to be safeguarded without interruption. The appointment of a new trustee must be facilitated by the issuing company to maintain compliance with SEBI regulations.

10. What Are the Contents of a Debenture Trustee Agreement?

A Debenture Trustee Agreement outlines the terms and conditions between the issuing company and the debenture trustee. It typically includes the following essential components:

1. Preamble:
   This section provides an introductory statement detailing the purpose of the agreement and the parties involved.
2. Description of the Debenture Instrument:
   It contains specific details regarding the nature and type of the debenture being issued.
3. Details of Charged Securities:
   This section outlines the security offered by the issuing company to safeguard the interests of debenture holders. Key elements include:

3. Nature of the Charge: Describes whether it is a fixed or floating charge on the asset.
4. Examination of Title: Verifies ownership of the charged property.
5. Ranking of the Charge: Specifies if the charge is a first, second, or pari passu (equal rank) charge.
6. Future Assets: Provisions for charging any future assets.
7. Timeframe for Creation of the Charge: Specifies the deadline for establishing the security.
8. Minimum Security Cover: Stipulates the minimum value of assets required to cover the debenture issue.
9. Valuation of Security: Provides guidelines on how the security will be valued.
10. Enforcement Conditions: Specifies the circumstances under which the security becomes enforceable.
11. Preservation of Secured Property: Details the method of safeguarding the secured assets.
12. Events of Default:
    Defines the situations that would constitute a default by the issuing company, such as non-payment or breach of agreement terms.
13. Rights of the Debenture Trustee:
    Enumerates the powers and rights granted to the trustee to act on behalf of debenture holders.
14. Obligations of the Issuing Company:
    Specifies the responsibilities and commitments of the issuing company in relation to the debenture issue.

Additional Provisions Included in the Agreement

• Definitions and Interpretation:
  Clarifies the key terms and their interpretations within the agreement.
• Appointment and Powers of the Debenture Trustee:
  Outlines the trustee’s authority and the scope of their role.
• Remuneration of the Debenture Trustee:
  Details the fees and compensation to be paid to the trustee for their services.
• Appointment of Trustee as Attorney:
  Authorizes the trustee to act as an attorney for the issuer in matters related to the security.
• Negative Pledge:
  Prevents the issuing company from creating additional encumbrances on the secured assets without the trustee’s consent.
• Description of Events of Default:
  Lists various scenarios of default, such as failure to pay interest, breach of obligations, or repudiation of the agreement.
• Notice of Exercise of Trustee Powers:
  Specifies the conditions under which the trustee can exercise their rights and powers.
• Indemnity of Trustee:
  Provides an indemnity clause to protect the trustee from liabilities incurred in the course of their duties.
• Retirement and Appointment of a New Trustee:
  Describes the process for the retirement of the existing trustee and the appointment of a successor.
• Reimbursement of Expenses:
  Specifies that the trustee will be reimbursed for any expenses incurred while fulfilling their obligations.
• General Covenants:
  Contains additional general terms and conditions applicable to both parties.

11. What Is the Role of a Debenture Trustee in Creating or Enforcing Security?

The creation of security involves mortgaging or pledging assets by the issuing company in favor of the Debenture Trustee for the benefit of the debenture holders. While the ownership of the secured property remains with the issuing company, the trustee holds the security on behalf of the debenture holders, who are the ultimate beneficiaries.

In case of default by the issuer—such as failure to pay interest or redeem the debentures—the Debenture Trustee has the authority to enforce the security. This typically involves selling the secured property following the procedure outlined in the Transfer of Property Act. The proceeds from the sale are then used to repay the debenture holders, ensuring their financial interests are protected.

12. Is the Appointment of a Debenture Trustee Mandatory?

Yes, under the provisions of the Companies Act, the appointment of a Debenture Trustee is mandatory for most debenture issues. However, there are certain exemptions:

• Exemption for Short-Term Debentures:
  If the debentures or bonds have a maturity period of 18 months or less, the appointment of a trustee is not required.
• Requirement for Long-Term Debentures:
  For debentures or bonds with a maturity period exceeding 18 months, the issuing company must appoint a trustee or an agent (regardless of whether the debentures are secured or unsecured) to safeguard the interests of the debenture holders.
• Treatment of Unsecured Debentures:
  Unsecured debentures issued to individual investors are typically treated as fixed deposits. In such cases, the issuer must adhere to regulations governing fixed deposits, even if a trustee is not appointed.

The role of the Debenture Trustee in both secured and unsecured debenture issues is critical to ensuring compliance with legal requirements and protecting investors’ interests.

13. Who Pays the Debenture Trustee?

In India, it is the responsibility of the issuer of the debentures to compensate the Debenture Trustee for their services.

14. Who Regulates Debenture Trustees?

In India, Debenture Trustees are regulated by the Securities and Exchange Board of India (SEBI) under the provisions of the SEBI (Debenture Trustees) Regulations, 1993. These regulations outline various aspects of their functioning, including:

• Eligibility Criteria: Requirements for registering as a Debenture Trustee.
• Monitoring and Review: Ongoing supervision of the trustee’s activities.
• Registration Process: Guidelines for obtaining and maintaining registration with SEBI.
• Code of Conduct: Ethical standards and practices that trustees must adhere to.
• Procedures for Handling Defaults: Steps to be taken in case of issuer default.
• Conflict of Interest: Measures to avoid and manage conflicts of interest.
• Inspection: SEBI’s authority to inspect the operations and records of debenture trustees.

These regulations apply to public debenture issues and those intended for listing on stock exchanges.

15. Can a Debenture Trustee Act for the Debenture Issue of an Associate Company?

No, a Debenture Trustee cannot act as the trustee for the issuance of debentures by an associate company. Additionally, a trustee is prohibited from serving if:

• The trustee has previously lent money to the issuing company and the loan has not been fully repaid.
• The trustee is planning to extend a loan to the issuing company.

16. Who is Responsible for Creating the Debenture Redemption Reserve (DRR)?

The responsibility for establishing the Debenture Redemption Reserve (DRR) lies with the issuing body corporate. This requirement is outlined in the SEBI Disclosure and Investor Protection (DIP) Guidelines and the SEBI (Debenture Trustees) Regulations, 1993.

The Debenture Trustee must ensure that the issuing company has created the DRR and is required to obtain an auditor’s certificate from the issuer as proof of compliance.