SEBI (Debenture Trustees) Regulations, 1993

What this chapter covers

This chapter carries 3 per cent of the III-A examination.

LEARNING OBJECTIVES: After studying this chapter, you should know about: Prerequisites for registering as a debenture trustee · Capital adequacy requirements for debenture trustee · Responsibilities and obligations of debenture trustee · Code of conduct for debenture trustees · Dissemination of information by debenture trustees

20.1 Registration

Debenture trustee means a trustee appointed in respect of any issue of debentures of a body corporate.

No person shall be entitled to act as a debenture trustee unless he is either –

• a) a scheduled bank carrying on commercial activity.

• b) a public financial institution within the meaning of section 2(72) of the Companies Act, 2013.

• c) an insurance company.

• d) body corporate as defined under sub-section (11) of section 2 of the Companies Act, 2013.

Four eligible classes — which is the first review question: a scheduled bank, a public financial institution and an insurance company may all apply, so all of the above.

What SEBI considers. The applicant should:

• Have the necessary infrastructure like adequate office space, equipment's and manpower to effectively discharge his activities.
• Have any experience as a debenture trustee or has in his employment a minimum of two persons who had the experience in matters which are relevant to a debenture trustee.
• Not have any person who is directly or indirectly is connected with the applicant who has not been granted registration by SEBI.
• Have in his employment at least one person who possesses the professional qualification in law from an institution recognised by the Government.
• Not have any of its director or principal officer convicted for any offence involving moral turpitude or have been found guilty of any economic offence.
• Be a fit and proper person as defined in the SEBI (Intermediaries) Regulations, 2008.
• Fulfil the capital adequacy requirements.

Note the legal qualification requirement — at least one person who possesses the professional qualification in law. A trustee enforces a trust deed; someone must be able to read it.

Validity. The certificate of registration granted... shall be valid unless it is suspended or cancelled by the Board.

Permanent until suspended or cancelled — the second review question.

Fees. There are three fees.

• Application. The non-refundable fee payable along with an application for registration shall be a sum of fifty thousand rupees.
• Registration. Every debenture trustee shall pay fees of twenty lakh rupees at the time of grant of certificate of registration. It is payable within fifteen days from the date of receipt of intimation from SEBI.
• Renewal block. Then comes a fee of nine lakh rupees every three years from the sixth year. It is payable three months before the expiry of the block for which the fee has been paid.

The same ladder as a merchant banker and a banker to an issue — Rs. 50,000, Rs. 20 lakh, Rs. 9 lakh — but with a three months payment lead instead of one month.

Permitted activities

A debenture trustee may also undertake:

• (a) activities which fall under the purview of any other financial sector regulator specified by the Board, in accordance with the regulations or guidelines issued by such financial sector regulator.

• (b) activities that do not fall under the purview of the Board or any other financial sector regulator, which shall be fee-based, non-fund based and pertain to the financial services sector; on an arms-length basis through separate business units of such debenture trustee.

Fee-based and non-fund based — the trustee may not put capital at risk in these lines.

**And a debenture trustee which is also regulated by the Reserve Bank of India, shall carry out the activity of debenture trustee through separate business unit of such debenture trustee. Existing registrants have six months from the notification of the... (Amendment) Regulations, 2025.

"Financial sector regulator" means the Reserve Bank of India, the Insurance Regulatory and Development Authority of India, the Pension Fund Regulatory and Development Authority, the International Financial Services Centres Authority, the Insolvency and Bankruptcy Board of India, the Ministry of Corporate Affairs and such other authorities as may be specified.

And critically: a debenture trustee shall ensure that the net worth specified under these regulations is ring-fenced from any adverse impact that may arise from undertaking the activities specified.

The eleven conditions for non-SEBI-regulated activities include these:

• They must be only at arms' length basis through one or more Separate Business Unit (SBU) of the DT, segregated by a Chinese Wall and ring-fenced from the SEBI regulated activities.
• A separate and distinct grievance redressal mechanism forms part of the SBU.
• There are separate records in the SBU.
• Staff are distinct. They can cross the Chinese Wall, subject to due procedures approved by the board of directors. The wall is not... applicable for the key managerial personnel.
• Shared information technology infrastructure is permitted under board-approved procedures.
• The website lists the non-SEBI activities along with a disclosure that none of the SEBI investor protection mechanism will be available. For existing activities this is done within thirty days.
• The relevant FSR is named where another regulator applies.
• Advertising or marketing material and webpages are kept separate.
• There is an upfront written disclosure on all engagement letters, contracts, agreements, and business communication. Stakeholders give confirmation... at the time of engagement, that they have understood the nature of the activity, risks involved and non-availability of any SEBI investor protection mechanism.
• A compliance report on existing arrangements goes to SEBI within a period of six months.
• An undertaking is given as part of the halfyearly compliance report... duly reviewed and approved by its board of directors.

20.2 Capital adequacy

The capital adequacy requirement shall not be less than the net worth of ten crore rupees, existing trustees on the commencement of the 2019 Amendment Regulations having three years to comply.

Rs. 10 crore.

20.3 Responsibilities and obligations

Before appointment

No debenture trustee shall act as such in respect of each issue of debenture unless – a. he enters into a written agreement with the body corporate before the opening of the subscription list for the issue of debentures.

Before the subscription list opens — not after money is raised.

**The agreement must contain an undertaking by the body corporate to comply with all regulations / provisions of Companies Act, 2013, guidelines of other regulatory authorities in respect of allotment of debentures till redemption, and the time limit within which the security for the debentures shall be created or the agreement shall be executed.

Not to act for an associate

A person shall not be appointed as a debenture trustee where the trustee:

• (a) is an associate of the body corporate.

• (b) beneficially holds shares in the company.

• (c) is promoter, director, or key managerial personnel or any other officer or an employee of the company or its holding, subsidiary or associate company.

• (d) is beneficially entitled to moneys which are to be paid by the company otherwise than as remuneration payable to the debenture trustee.

• (e) is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company.

• (f) has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon.

• (g) has any pecuniary relationship with the company amounting to 2% or more of its gross turnover or total income or ₹50 lakh or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year.

• (h) is relative of any promoter or any person who is in the employment of the company as director or key managerial personnel.

• (i) is likely to have a conflict of interest in any other manner.

Nine grounds, the last a catch-all — and one exception: the requirement does not apply wherever there is a guarantee by the state / central government for the debentures issued.

And a lending bar: the trustee 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, subject to narrow historical exceptions.

Because a lender-trustee has divided loyalties — its own recovery against the debenture holders'.

The trust deed and grievances

Every debenture trustee shall amongst other matters, accept the trust deeds which shall contain the matters as specified in section 71 of Companies Act, 2013 and Form No. SH.12, and such trust deed shall consist of two parts: a. Part A containing statutory/standard information pertaining to the debt issue; b. Part B containing details specific to the particular debt issue.

Dispute resolution — Regulation 14A. All claims, differences or disputes between a debenture trustee and a body corporate which has appointed the debenture trustee, arising out of or in relation to the activities of the debenture trustee in the securities market must be submitted to a resolution mechanism that includes mediation and/or conciliation and/or arbitration. And: no loss or damage or expenses incurred by the debenture trustee or the body corporate... will be met out of the trust property.

The trust property is for the debenture holders, not for the parties' disputes.

Grievances — Regulation 14B. The debenture trustee must redress investor grievances promptly but not later than twenty-one calendar days from the date of receipt of the grievance.

The twenty duties — Regulation 15

First, the offer document and reporting. The trustee must:

• Satisfy itself that the prospectus or letter of offer does not contain any matter which is inconsistent with the terms of the issue of debentures or with the trust deed.
• Satisfy itself that the covenants in the trust deed are not prejudicial to the interest of the debenture holders.
• Call for periodical status/ performance reports from the issuer company within 7 days of the relevant board meeting or within 45 days of the respective quarter whichever is earlier.
• Communicate promptly to the debenture holders' defaults, if any, with regard to payment of interest or redemption of debentures and action taken by the trustee.

The nominee director trigger. The trustee shall appoint a nominee director on the Board of the company in the event of: (i) two consecutive defaults in payment of interest to the debenture holders; or (ii) default in the creation of security for debentures; or (iii) default in the redemption of debentures.

Three triggers, and note that interest default must be twice consecutively while security and redemption defaults bite at once.

Then, monitoring and enforcement. The trustee must:

• Ensure that the company does not commit any breach of the terms of issue of debentures or covenants of the trust deed by monitoring the same and take such reasonable steps as may be necessary to remedy any such breach.
• Inform the debenture holders immediately of any breach.
• Ensure the implementation of the conditions regarding creation of security for the debentures, if any, debenture redemption reserve and recovery expense fund.
• 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 the debenture holders.
• Do such acts as are necessary in the event the security becomes enforceable.
• Call for reports on the utilization of funds raised by the issue of debentures.
• Take steps to convene a meeting of the holders of debentures.
• Ensure that the debentures have been converted or redeemed in accordance with the terms.
• Perform such acts as are necessary for the protection of the interest of the debenture holders.
• Take possession of trust property in accordance with the provisions of the trust deed.
• Take appropriate measures for protecting the interest of the debenture holders as soon as any breach of the trust deed or law comes to his notice.

Four things the trustee must ascertain and satisfy itself about. It must check that:

• The debenture certificates have been dispatched by the body corporate to the debenture holders within 30 days of the registration of the charge with the Registrar of Companies where a charge is registered after an allotment letter.
• Certificates have been dispatched... or debentures have been credited in the Demat accounts as required.
• Interest warrants for interest due on the debentures have been dispatched to the debenture holders on or before the due dates.
• Debenture holders have been paid the monies due to them on the date of redemption of the debentures.

Those last two are what Axis Trustee failed to monitor.

And: inform SEBI immediately of any breach of trust deed or provision of any law, which comes to the knowledge of the trustee. Communication to holders may be made by electronic media, press-release and placing notice on its website.

Due diligence: exercise due diligence to ensure compliance by the body corporate, with the provisions of the Companies Act, [LODR] Regulations, 2015, the listing agreement of the stock exchange or the trust deed or any other regulations issued by SEBI pertaining to debt issue.

Where listed debt securities are secured: on a Quarterly basis- carry out the necessary due diligence and monitor the security cover; and on a Half-Yearly basis- obtain a Certificate from the statutory auditor of the issuer regarding security cover including compliance with the covenants of the Offer document/information memorandum.

Plus: obtain reports from the lead bank regarding the progress of the project · monitor utilisation of funds raised in the issue · and obtain a statutory auditor's certificate in respect of utilisation of funds during the implementation period of the project and, in the case of debentures issued for financing working capital, at the end of each accounting year.

Meetings, relinquishment, net worth and security

A debenture trustee shall call or cause to be called by the body corporate a meeting of all the debenture holders on- (a) a requisition in writing signed by at least one-tenth of the debenture holders in value for the time being outstanding; (b) the happening of any event, which constitutes a default or breach of covenants... or which in the opinion of the debenture trustees affects the interest of the debenture holders.

One-tenth in value, and consent through e-voting, wherever applicable is permitted. The meeting requirement in case of a default in payment obligation by the issuer, shall not be applicable in case of debentures issued by way of public issue.

No exit without a successor: no debenture trustee shall relinquish its assignments as debenture trustee in respect of the debenture issue of anybody corporate, unless and until another debenture trustee is appointed in its place by the body corporate.

Net worth: maintained continuously, with SEBI informed immediately in respect of any shortfall, and in that case the trustee shall not be entitled to undertake new assignments until it restores the net worth.

Inspection: it may inspect books of account, records, registers of the body corporate and the trust property to the extent necessary for discharging its obligations.

Before a charge is created: the trustee shall exercise independent due diligence to ensure that such security is free from any encumbrance or that it has obtained the necessary consent from other charge-holders if the security has an existing charge.

And inter-creditor agreements may be entered on behalf of the debenture holders... under the framework specified by the Reserve Bank of India, subject to the approval of the debenture holders.

Books

Every debenture trustee shall keep and maintain proper books of account, records and documents, relating to the trusteeship functions for a period of not less than five financial years from the date of redemption of debentures, and shall intimate to SEBI, the place where the books of account, records and documents are maintained.

Five financial years from redemption — not from creation, so the clock starts when the obligation ends.

20.4 Code of conduct

Thirty-one clauses under Regulation 16 and Schedule III. The trustee shall make all efforts to protect the interest of debenture holders · maintain high standards of integrity, dignity and fairness · fulfil its obligations in a prompt, ethical and professional manner · at all times exercise due diligence, ensure proper care and exercise independent professional judgment · take all reasonable steps to establish the true and full identity of each of its clients, and each client's financial situation and maintain a record of the same.

On changes: ensure that any change in registration status/any penal action taken by SEBI or any material change in a financial position that may adversely affect the interests of clients/debenture holders are promptly informed to the clients, with outstanding business transferred to another registered intermediary.

On conflicts: avoid conflict of interest and make adequate disclosure of its interest · put in place a resolution mechanism · and make appropriate disclosure to the client of its possible source or potential areas of conflict of duties and interest.

Confidentiality save with permission or under law; no unfair competition, including wean[ing] away from the clients of another trustee on assurance of lower fees; and no discrimination except and save on ethical and commercial considerations.

A clause peculiar to this intermediary: share information available with-it regarding client companies, with registered credit rating agencies.

That is the clause Axis Trustee breached by not sharing the issuer's non-cooperation.

On debenture holders: provide adequate and appropriate information about its business, including contact details, services available to clients, and the identity and status of employees · ensure that adequate disclosures are made to the debenture holders, in a comprehensible and timely manner so as to enable them to make a balanced and informed decision · 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 · and make reasonable efforts to avoid misrepresentation.

Towards SEBI: maintain knowledge and competency, and comply with the award of the Ombudsman passed under the Securities and Exchange Board of India (Ombudsman) Regulations, 2003 — the fourth review question, True; make no untrue statement or suppress any material fact in any documents, reports, papers or information furnished to SEBI — which is clause 19, the clause Axis Trustee breached by omitting Reliance Communications from its half-yearly default list; no insider trading by the trustee or its managers through their associates or family members, relatives or friends; and prompt information about any action, legal proceeding, etc., initiated against it.

Public advice requires disclosure of his interest including long or short position in the said security, with employees disclosing also the interest of his dependent family members and that of the employer.

Governance: fit and proper employees · adequate supervision · internal control procedures and financial and operational capabilities... to protect its operations, its clients, debenture holders and other registered entities from financial loss arising from theft, fraud, and other dishonest acts, professional misconduct or omissions · responsibility for employees and agents · adequate freedom and powers to its compliance officer · senior management access to information · good corporate policies and corporate governance · an internal code of conduct · and no part in creation of false market, price rigging or manipulation or passing of unpublished price sensitive information.

20.5 Monitoring and disclosure

The debenture trustee(s) shall undertake an independent periodical assessment of the compliance with covenants or terms of the issue of listed debt securities including for 'security created', incorporating the terms of periodical monitoring in the debenture trust deed.

Reports to the stock exchanges:

For existing debt securities, listed entities and trustees shall enter into supplemental/amended debenture trust deed within 120 days from the date of this circular, and where there is more than one trustee they may choose a common agency for the preparation of asset cover certificate.

Disclosures on the trustee's own website:

The third review question rests on the half-yearly row — breaches of covenants, the status of issues handled and the action taken by the trustee are disclosed on a half-yearly basis.

T+1 for ratings and payment status is the fastest clock in the chapter, and for good reason: a downgrade or a missed payment is what a debenture holder most needs to know.

20.6 Compliance officer

Every debenture trustee shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions, etc., issued by the Board or the Central Government and for redressal of investors' grievances.

The compliance officer shall immediately and independently report to the SEBI any non-compliance observed by him, and shall report any non-compliance, with the requirements specified in the listing agreement with respect to debenture issues and debenture holders, by the body corporate to the SEBI.

Note the second duty — the officer reports the issuer's non-compliance, not merely the trustee's own.

**And: the Compliance Officer so appointed shall obtain certification in terms of the SEBI CAPSM Regulations, 2007 or as may be specified by the SEBI.

Investor Charter: the debenture trustee shall ensure compliance with the Investor Charter specified by the Board from time to time.

Case 20.1 — SEBI settlement, Axis Trustee Services Ltd

The setting. Reliance Communications Ltd had defaulted in repayment of the principal as well as interest due on NCD issued by it. CARE and ICRA downgraded ratings assigned to NCDs issued by RCL to default (D) as the company delayed in payment of interest as well as principal on its NCDs, and ATSL was acting as Debenture Trustees for the aforementioned NCDs.

Four failures.

ATSL has not monitored payment of interest/principal made by the issuer company to debenture holders so as to ascertain and satisfy itself that the debenture holders have been paid the dues in a timely manner — and ATSL did not carry due verification to ascertain the status of payment of NCDs.

Non-co-operation by the issuer company was not shared by the ATSL with credit rating agencies (violation of SEBI circular of March 15, 2013).

ATSL in its half-yearly report submitted for the half-year ended 2017 did not mention RCL in the list of companies that have defaulted in payment of interest/principal on their NCD. (violation of clause 19 of Code of Conduct and Regulation 16).

ATSL neither issued a press release nor informed SEBI regarding default by RCL in payment of interest/principal to debenture holders on the due date (violation of SEBI circular of August 6, 2007).

The provisions engaged were Regulation 15(1)(g)(iii) &(iv) of SEBI Debenture Trustee Regulations 1993 (now 15(1)(q)(iii) &(iv)...) — the duties to satisfy itself that interest warrants... have been dispatched to the debenture holders on or before the due dates and that debenture holders have been paid the monies due to them on the date of redemption.

**A show cause notice issued on September 06, 2018; at the personal hearing the representative said ATSL would like to file an application for settlement and request to keep adjudication in abeyance.

Order: applicant paid a sum of Rs 15,93,750/- towards settlement charges.

The chapter's review questions confirm that a scheduled bank, a public financial institution and an insurance company may all apply — all of the above; that the certificate is valid permanently until suspended; that breaches, the status of issues and action taken are communicated on a half-yearly basis; and that it is True that a debenture trustee must comply with the award of the Ombudsman.