DEBENTURE TRUSTEE
DEBENTURE TRUSTEE- Under Companies Act, 2013 SERIES NO 139
Who is a
Debenture Trustee?
According to
SEBI Rules, 1993- “debenture trustee” means a trustee
of a trust deed for securing any issue of debentures of a body corporate
[section 2 (bb)].
SECURITIES AND EXCHANGE BOARD OF INDIA (DEBENTURE TRUSTEES) REGULATIONS, 1993: These regulations may be called the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993. These regulations govern the registration and other provisions relating to Debenture Trustee.
SECURITIES AND EXCHANGE BOARD OF INDIA (DEBENTURE TRUSTEES) REGULATIONS, 1993: These regulations may be called the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993. These regulations govern the registration and other provisions relating to Debenture Trustee.
Who regulates
Debenture Trustee?
In
India, Debenture Trustees are regulated by SEBI. The SEBI (Debenture Trustees)
Regulations, 1993 govern the Debenture Trustees and provide for eligibility
criteria for registration of Debenture Trustees, monitoring and review,
registration, Code of Conduct, procedure of action in case of defaults,
avoidance of conflict of interest and inspection of Debenture Trustees by SEBI,
amongst other things. Public issues and issues proposed to be listed are
covered under the said regulations.
RULES/ SECTION/ CIRCULAR:
Section 71(5):Provision
of Debenture Trustee
Rule 18(2) of the Companies
(Share Capital and Debentures) Rules, 2014
APPLICABILITY
TO APPOINT DEBENTURE TRUSTEE:
In the following below
mentioned situations Companies required to appoint Debenture Trustee:
§ When company
issue a prospectus or make an offer or invitation to the public
§ When
company make an offer or invitation to its members exceeding 500 (five hundred)
for the subscription of its debentures.
WHO CANBEAPPOINTEMTN AS DEBENTURETRUSTEE?
In general to act as debenture trustee, the
entity should either be a scheduled bank carrying on commercial activity, a
public financial institution, an insurance company, or a body corporate. The
entity should be registered with SEBI to act as a debenture trustee.
CONDITIONS FOR APPOINTEMTN OFDEBENTURE TRUSTEE:
Rule 18(2)(a) (b) of the Companies (Share Capital and Debentures)
Rules, 2014: states the conditions for appointment of debenture trustee.
§ The names of the
debenture trustees shall be stated in letter of offer inviting subscription for
debentures, and
§ The names of the
debenture trustees shall be stated in all the subsequent notices or other
communications sent to the debenture holders
§ A statement regarding consent of debenture trustee shall appear in the
letter of offer issued for inviting the subscription of the debentures
§ A written [1]consent
shall be obtained from such debenture trustee or trustees proposed to be
appointed
NON ELIGIBILITYTO
APPOINT ASDEBENTURE TRUSTEE:
Rule 18(2)(c) of the Companies (Share Capital and Debentures) Rules,
2014: A person shall not be appointed as a debenture trustee, if he-
§ 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 two per cent. or more of its gross
turnover or total income or fifty lakh rupees 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
DUTIESOF DEBENTURE TRUSTEE:
The Debenture Trustee is
an intermediary between the issuer of debentures and the holders ofdebentures.
Accordingly the main responsibility of debenture trustee is to protect the
interest of debenture holder.
Section 71(5) stated that- A debenture
trustee shall take steps
§ To protect the interests
of the debenture- holders and
§ To redress their
grievances in accordance with such rules as may be prescribed
Rule 18(2) of the Companies (Share Capital and Debentures) Rules, 2014:
It shall be the duty of every debenture trustee to-
§
LOO:Satisfy
him that the letter of offer does not contain any matter which is inconsistent
with the terms of the issue of debentures or with the trust deed.
§
Deed:satisfy
himself that the covenants in the trust deed are not prejudicial to theinterest
of the debenture holders;
§
Communication to Debenture Holders: Communicate promptly to the debenture
holders defaults, if any, with regard to
Ñ
payment
of interest or
Ñ
redemption
of debentures and action takenby the trustee therefor;
§
Toward debenture holder: Ensure that the company does not
commit any breach of
§
Creation of Security:
Ñ
Ensure
the implementation of the conditions regarding creation of security for the
debentures, if any.
Ñ
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 thedebenture holders
Ñ
do
such acts as are necessary in the event the security becomes enforceable.
§
Debenture Redemption Reserve: Ensure the implementation of the
conditions regarding debenture redemption reserve
§
Meeting:
take steps to convene a meeting of the holders of debentures as and when such
meeting is required to be held
§
Redemption & conversion: ensure that the debentures have been
converted or redeemed inaccordance with the terms of the issue of debentures.
Ñ
the
terms of issueof debentures or covenants of the trust deed and
Ñ
take
such reasonable stepsas may be necessary to remedy any such breach
Ñ
inform
the debenture holders immediately of any breach of the terms ofissue of
debentures or covenants of the trust deed
Ñ
perform
such acts as are necessary for the protection of the interest of the debenture
holders and do all other acts as are necessary in order toresolve the
grievances of the debenture holders
§
Appointment of Nominee Director: appoint a nominee director on the
Board of the company in the event of-
Ñ
Two
consecutive defaults in payment of interest to the debenture holders;or
Ñ
Default
in creation of security for debentures; or
Ñ
Default
in redemption of debentures.
§
Other Duties:
Ñ
Call
for periodical status or performance reports from the Company.
Ñ
Call
for reports on the utilization of funds raised by the issue of debentures
CASUAL VACANCY
ASDEBENTURE TRUSTEE:
Appointment of debenture trustee in case
of casual vacancy will be filed by Board of Directors. (May be by meeting or by
circular resolution) subject to following conditions:
Ñ
where
such vacancy is caused by the resignation of the debenture trustee, the vacancy
shall only be filled with the written consent ofthe majority of the debenture
holders
If such casual vacancy continue in the
meantime if there is any trustee or trustees they may act on vacated place as
trustee.
CONDITION FOR CALLINGOF MEETINGOF DEBENTURE HOLDERS:
Rule 18(5) of the Companies (Share Capital and Debentures) Rules, 2014:
The meeting of all the debenture holders shall be convened by the debenture
trusteeon-
Ñ Requisition in writing signed by
debenture holders holding at least one-tenth in value of the debentures for the
time being outstanding;
Ñ The happening of any event, which constitutes a
breach, default or which in the opinion of the debenture trustees affects the
interest of the debenture holders
CONTENTSOF THE DEBENTURE TRUSTEE
AGREEMENT:
Below mentioned are some of the clauses which areto be included in the
Debenture Trustee Agreement. They are;
a) Preamble,
b) Description of the
Instrument,
c) Details of charged securities
i.
nature
of charge,
ii.
examination
of title,
iii.
rank
of the charge, i.e., whether first, second, or paripassu charge, etc.
iv.
charging
of future assets,
v.
time
limit for creation of charge,
vi.
minimum
security cover required,
vii.
valuation
of security,
viii.
circumstances
in which security becomes enforceable,
ix.
method
and preservation of secured property etc.
d) Events of default.
e) Rights of Debenture
Trustee.
f) Obligations of the body
corporate (i.e., Issuer ofdebentures).
Apart from the above, the Agreement will have to include thefollowing
provisions :
(i)
Definition and
Interpretation,
(ii)
Appointment of Debenture
trustee and its powers,
(iii)
Remuneration of Debenture
Trustee,
(iv)
Appointment of debenture
Trustee as Attorney,
(v)
Negative pledge ie not to
create additional encumbranceson the secured asset,
(vi)
Description of Events of
Default, which may arise due toNon-payment to debenture holders, breach of
anyundertaking, avoidance or repudiation, etc.
(vii)
Notice of exercise of
trustee powers,
(viii)
Indemnity of trustee,
(ix)
Retirement of trustee
& appointment of new trustee,
(x)
Reimbursement of expenses
incurred by the trustee,
(xi)
General covenants etc.
ROLE OF DEBENTURE TRUSTEEWITH RESPECT TO CREATION
OR ENFORCING THE SECURITY:
Creation of security means mortgaging the property in favorof Debenture
Trustee for the benefit ofdebenture holders.This is an incidence of ownership
of property and creation ofsecurity has to be done by the owner of the
property. However,the debenture holders are beneficiaries and they have no
accessto mortgaged property. The Debenture Trustee holds thesecured property on
behalf of issuer of security and for benefitof debenture holders. In the event
of default by the issuer ofsecurity, the Debenture Trustee will have the power
andauthority to bring the secured property to sale following theprocedure in
the Transfer of Property Act and the proceeds ofsale will have to be applied to
redeem the debentures. This isone of the powers conferred on the Debenture Trustee
by theSEBI Regulations. Effective use of this power is possible if thispower is
included in the Debenture Trustee Agreement and asuitable power of attorney is
executed by the issuer ofdebentures in favor of Debenture Trustee. This
document hasto be executed as a trust deed and not as a Mortgage deed or
bond.
PROCESSOF APPOINTMENT
OF DEBENTURE TRUSTEE:
Work required to done before calling of Meeting:
ü First check offer for
subscription is for more than 500 persons or to public
ü Identify the debenture
trustee
ü Obtain the consent of
such debenture trustee.
STEP-1
Call Meeting of Board Director:
ü Issue Notice of Board Meeting
to all the directors of Company at least 7 days before the date of Board Meeting.
ü Attach Agenda, Notes to Agenda and draft
resolution of Board Meeting along with Notice.
ü Approach the Debenture
trustee.
STEP-II
Hold
the Board Meeting:
ü Check the quorum of
Board Meeting.
ü Pass Board Resolution
for appointment of debenture trustee.
ü Authorize a director/officer
of Company to sing the debenture trustee agreement.
There
is no need to file any form for appointment of Debenture Trustee.
Can a Debenture Trustee act for issue of
debentures of an associate?
A debenture trustee cannot act for any issue of debentures of its
associate or if it has lent and the loan is not yet fully repaid or is
proposing to lend money to the body corporate.
CONCLUSION:
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