Debenture trustee
Also written Debenture trustees · DT
The SEBI-registered trustee of the trust deed securing an issue of debentures — the debenture holders' agent, standing between them and the issuer for the life of the paper.
In plain language
Thousands of people can hold the same debenture. None of them individually can inspect the issuer's security, chase a missed interest payment or enforce a charge — and if they each tried, the issuer would face thousands of separate claims on the same promise.
A debenture trustee solves that by being one party who acts for all of them. Under the SEBI (Debenture Trustees) Regulations, 1993 it is the trustee of the trust deed securing an issue of debentures of a body corporate, appointed before the money is raised and in place until redemption.
Because it represents the lenders against the borrower who pays its fee, the regulations spend most of their length on two things: who is financially strong enough to do the job, and who is too close to the issuer to be allowed to.
How it works
Who may be one. Only four kinds of entity: a scheduled bank carrying on commercial activity; a public financial institution within the meaning of section 2(72) of the Companies Act, 2013; an insurance company; or a body corporate as defined under section 2(11) of that Act.
What SEBI looks for. Adequate infrastructure — office space, equipment and manpower; experience as a debenture trustee or at least two employees with relevant experience; at least one employee professionally qualified in law from a government-recognised institution; no director or principal officer convicted of an offence involving moral turpitude or found guilty of an economic offence; fit and proper status under the SEBI (Intermediaries) Regulations, 2008; and satisfaction of the capital adequacy requirement.
The money. A non-refundable application fee of Rs 50,000; Rs 20 lakh on grant of the certificate, payable within fifteen days of SEBI's intimation; and Rs 9 lakh every three years from the sixth year, payable three months before the block expires. Capital adequacy is a net worth of not less than Rs 10 crore. The certificate itself is valid unless suspended or cancelled — there is no fixed expiry date.
Before appointment. No debenture trustee may act for an issue unless it has entered into a written agreement with the body corporate before the opening of the subscription list, containing the issuer's undertaking to comply with the Companies Act, 2013 and other regulators' requirements on allotment until redemption, and the time limit within which the security is to be created.
A worked example
Arcadia Infrastructure Ltd plans a Rs 500 crore secured NCD issue and approaches Sentinel Trusteeship Services Ltd.
Can Sentinel take the mandate? Sentinel earned Rs 1.1 crore in fees from Arcadia over the two immediately preceding financial years. Arcadia's gross turnover is Rs 900 crore, so 2% of turnover is Rs 18 crore. But the disqualification bites where the pecuniary relationship amounts to 2% or more of gross turnover or total income, or Rs 50 lakh, whichever is lower — so the governing figure is Rs 50 lakh, and Sentinel's Rs 1.1 crore is well past it. Sentinel is disqualified. The arithmetic that traps candidates is that the lower of the two amounts applies, which means the Rs 18 crore number never matters.
Arcadia appoints Keystone Trustees Ltd instead. Keystone must hold net worth of not less than Rs 10 crore, employ at least one person professionally qualified in law and at least two with relevant experience, and sign the trust agreement with Arcadia before the subscription list opens — not before allotment, and not before listing.
Keystone's own registration economics look like this: Rs 50,000 non-refundable with the application, Rs 20 lakh on grant paid within fifteen days of intimation, and Rs 9 lakh every three years from the sixth year, paid three months ahead of each block.
Why NISM asks about it
Chapter 20 (SEBI (Debenture Trustees) Regulations, 1993), sections 20.1 to 20.3. The questions are overwhelmingly numeric: who is eligible to be a debenture trustee, the Rs 10 crore net worth, the three fee figures, and the 2% / Rs 50 lakh whichever is lower conflict test. The timing of the agreement — before the opening of the subscription list — is the other reliable question.
Common exam traps
- Only four categories qualify. A partnership firm or an individual cannot be a debenture trustee however experienced.
- Net worth is Rs 10 crore, and it must be ring-fenced from any adverse impact arising out of non-SEBI-regulated activities the trustee also undertakes.
- The pecuniary relationship test takes the lower of 2% of gross turnover or total income and Rs 50 lakh — candidates routinely take the higher.
- The agreement with the issuer is signed before the subscription list opens. Anything later is a breach even if the deed is eventually perfect.
- The certificate has no expiry; it is valid unless suspended or cancelled. The triennial Rs 9 lakh fee from the sixth year keeps it in force but is not a renewal.
- Non-SEBI-regulated activities must be fee-based, non-fund based, in the financial services sector, at arm's length through a separate business unit behind a Chinese Wall, with its own grievance mechanism and a website disclosure that no SEBI investor protection mechanism is available for them. A trustee also regulated by the RBI must carry on the debenture trustee activity through a separate business unit.
Check yourself
1.Which of the following may apply for registration as a debenture trustee?
- a)All of the above — a scheduled bank, a public financial institution and an insurance company
- b)A scheduled bank only
- c)A public financial institution only
- d)An insurance company only
Show the answer
Answer: (a) All of the above — a scheduled bank, a public financial institution and an insurance company
No person shall be entitled to act as a debenture trustee unless he is either – a) a scheduled bank carrying on commercial activity; or b) a public financial institution within the meaning of section 2(72) of the Companies Act, 2013; or c) an insurance company; or d) body corporate as defined under sub-section (11) of section 2 of the Companies Act, 2013.
Four eligible classes — the three named in the options, plus a body corporate.
Eligibility is only the first hurdle. SEBI also requires the necessary infrastructure like adequate office space, equipment's and manpower; any experience as a debenture trustee or... a minimum of two persons who had the experience in matters which are relevant to a debenture trustee; that no connected person has been refused registration; at least one person who possesses the professional qualification in law from an institution recognised by the Government; no director or principal officer convicted for any offence involving moral turpitude or... found guilty of any economic offence; fit and proper status under the SEBI (Intermediaries) Regulations, 2008; and fulfilment of the capital adequacy requirements — net worth of ten crore rupees.
The legal qualification is distinctive. A trustee must read and enforce a trust deed, so at least one lawyer is required in-house.
Fees: fifty thousand rupees with the application, twenty lakh rupees on grant paid within fifteen days from the date of receipt of intimation from SEBI, and nine lakh rupees every three years from the sixth year paid three months before the expiry of the block.
And note that eligibility as an institution does not guarantee eligibility for a particular issue. A bank may not be appointed where it has lent and the loan is not yet fully repaid or is proposing to lend money to the body corporate.
2.For how long is a certificate of registration as debenture trustee valid?
- a)Permanently, unless suspended or cancelled by SEBI
- b)For 1 year
- c)For 3 years
- d)For 4 years
Show the answer
Answer: (a) Permanently, unless suspended or cancelled by SEBI
The certificate of registration granted under sub-regulation (1) shall be valid unless it is suspended or cancelled by the Board.
No expiry date — the certificate runs until SEBI ends it.
Option C is the trap, because a fee falls due every three years: a debenture trustee who has been granted a certificate of registration, to keep its registration in force, shall pay a fee of nine lakh rupees every three years from the sixth year, from the date of grant of certificate of registration, payable three months before the expiry of the block for which the fee has been paid.
A recurring fee is not a recurring registration.
The same structure appears elsewhere in this syllabus. A banker to an issue's certificate shall be valid unless it is suspended or cancelled by SEBI; a depository participant's certificate shall be valid unless it is suspended or cancelled by SEBI; and a portfolio manager's certificate shall be valid unless it is suspended or cancelled by the Board.
What can end it. Non-payment of fees, or action under the intermediaries framework — and separately, a net worth shortfall does not cancel registration but does mean the trustee shall not be entitled to undertake new assignments until it restores the net worth to the level of specified requirement within the time specified by SEBI.
**Net worth must in any case be maintained continuously, with SEBI informed immediately in respect of any shortfall.
And the trustee cannot simply walk away from work in hand: no debenture trustee shall relinquish its assignments... unless and until another debenture trustee is appointed in its place by the body corporate.
3."The debenture trustee shall comply with the award of the Ombudsman passed under the SEBI (Ombudsman) Regulations, 2003." True or False?
- a)True
- b)False
Show the answer
Answer: (a) True
Clause 18 of the code of conduct requires the trustee to maintain the required level of knowledge and competency and abide by the provisions of the Act, regulations and circulars and guidelines. The debenture trustee shall also comply with the award of the Ombudsman passed under the Securities and Exchange Board of India (Ombudsman) Regulations, 2003.
The same clause appears across this syllabus — for stockbrokers' underwriting conduct, merchant bankers, bankers to an issue, depository participants and RTAs alike.
Its neighbours in the code are the other duties towards the regulator: the trustee shall not make an untrue statement or suppress any material fact in any documents, reports, papers or information furnished to SEBI — clause 19, the one Axis Trustee breached — and shall ensure that SEBI is promptly informed about any action, legal proceeding, etc., initiated against it in respect of any material breach or non-compliance by it, of any law, rules, regulations, directions of SEBI or any other regulatory body.
Grievance machinery sits alongside. Under Regulation 14B the trustee must redress investor grievances promptly but not later than twenty-one calendar days from the date of receipt of the grievance, and the code requires it to endeavour that inquiries from debenture holders are adequately dealt with, that grievances of debenture holders are redressed in a timely and appropriate manner, and that where a complaint is not redressed promptly, the debenture holder is advised of any further steps which may be available.
And disputes with the issuer have their own route — under Regulation 14A they go to mediation and/or conciliation and/or arbitration, with no loss or damage or expenses incurred by the debenture trustee or the body corporate... met out of the trust property.
**The compliance officer must immediately and independently report to the SEBI any non-compliance observed by him.
Where this is taught
- Series X-A · Chapter 6: Securities Market Segmentsintroduced here
- Series III-A · Chapter 20: SEBI (Debenture Trustees) Regulations, 1993introduced here
Related terms
- Chinese WallAn enforced separation inside a firm between departments holding confidential price-sensitive information and those dealing with clients, sales or public research.
- Conflict of interestAny interest of the analyst's own — a shareholding, a fee, a relationship — that could bias the research, and which the regulations require to be disclosed rather than merely avoided.
- Fit and properA test applied to an applicant for registration based on integrity, honesty, ethical behaviour, reputation, fairness and character, and the absence of disqualifications specified by SEBI such as a criminal complaint…
- Credit Rating AgencyA SEBI-regulated company (under the CRA Regulations, 1999) that summarises an issuer's risk into a letter grade from AAA down to D.
- Net worthEverything you own minus everything you owe — the one number that says where a household actually stands, and the starting point of any financial plan.