Debenture trustee

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.

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.

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.

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.

• 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.