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The Securities and Exchange of India (Debenture Trustees) Regulations, 1993 have been enacted to provide procedures and rules for debenture trustees.
Brief History of the Regulations
The Securities and Exchange Board of India (SEBI) with the approval of the Central Government has enacted the SEBI (Debenture Trustees) Regulations, 1993 by powers given under Section 30 of the SEBI Act, 1992 through Notification No. SEBI/LE/12/93 dated 29th December, 1993.
List of Amendments
- SEBI (Debenture Trustees) (Amendment) Regulations, 1998
- Securities Laws (Second Amendment) Act, 1999
- SEBI (Debenture Trustees) (Amendment) Regulations, 2000
- SEBI (Debenture Trustees) (Second Amendment) Regulations, 2000
- SEBI (Appeal to Securities Appellate Tribunal)(Amendment) Regulations, 2000
- SEBI (Investment Advice by Intermediaries) (Amendment) Regulations, 2001
- SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002
- SEBI (Debenture Trustees) (Amendment) Regulations, 2003
- SEBI (Criteria for Fit and Proper Persons) Regulations, 2004
- SEBI (Debenture Trustees) (Amendment) Regulations, 2006
- SEBI (Intermediaries) Regulations, 2008
- SEBI (Issue of Capital and Disclosure) Requirements, 2009
- SEBI (Debenture Trustees) (Amendment) Regulations, 2011
- SEBI (Debenture Trustees) (Second Amendment) Regulations, 2011
- SEBI (Change in Conditions of Registration of Certain Intermediaries) (Amendment) Regulations, 2011
- SEBI (Payment of Fees) (Amendment) Regulations, 2014
- SEBI (Change in Conditions of Registration of Certain Intermediaries) (Amendment) Regulations, 2016
- SEBI (Payment of Fees and Mode of Payment) (Amendment) Regulations, 2017
1. Important Definitions
Associate in relation to a debenture trustee, or body corporate includes a person who, directly or indirectly, by himself, or in combination with relatives, exercises control over the debenture trustee or the body corporate, as the case may be or in respect of whom the debenture trustee or the body corporate, as the case may be, directly or indirectly, by itself, or in combination with other persons, exercises control or whose director, is also a director, of the debenture trustee or the body corporate, as the case may be.
Change in Control in relation to a debenture trustee, means that if its shares are listed on any recognised stock exchange, change in control within the meaning specified under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 or in any other case, change in the controlling interest in the body corporate. The expression “controlling interest” means an interest, whether direct or indirect, to the extent of at least 51% of voting rights in the body corporate.
Debenture Trustee means a trustee of a trust deed for securing any issue of debentures of a body corporate.
Issue means an offer of sale of securities by any body corporate or by any other person or group of persons on its or their behalf, as the case may be, to the public, or the holders of securities of such body corporate or person or group of persons and includes a private placement of debentures made by a listed company, which are proposed to be listed.
Networth means aggregate of value of the paid-up equity capital and free reserves (excluding reserves created out of revaluation) reduced by the aggregate value of accumulated losses and deferred expenditure not written off (including miscellaneous expenses not written off) as per the latest audited balance sheet.
Principal Officer means a secretary, manager or director of the body corporate or any person connected with the management or administration of the body corporate upon whom the Board has served notice of its intention of treating him as the principal officer.
Trust Deed means a deed executed by the body corporate in favour of the trustees named therein for the benefit of the debenture holders.
2. Registration of Debenture Trustees
- An application by a debenture trustee for grant of a certificate of registration has to be made to the Board in Form A.
- An application for registration made, has to be accompanied by a non-refundable application fee as specified in Schedule II.
- Any application made by a debenture trustee prior to coming into force of these regulations containing such particulars as near thereto as mentioned in Form A has to be treated as an application made in pursuance the procedure stated above.
- The Board may require the applicant to furnish further information or clarification regarding matters which are relevant to a debenture trustee to consider the application for a grant of a certificate.
- The applicant or its principal officer has to, if so required, appear before the Board for personal representation.
- Any application which is not complete in all respects and does not conform to the instructions specified in the form, has to be rejected. Before rejecting any such application, the applicant has to be given an opportunity to remove, within the time specified, such objections as may be indicated by the Board.
- The Board has to take into account for considering the grant of a certificate, all matters which are relevant to a debenture trustee and in particular, whether the applicant has the necessary infrastructure like adequate office space, equipments, and manpower to effectively discharge his activities, has any past experience as a debenture trustee or has in his employment minimum 2 persons who had the experience in matters which are relevant to a debenture trustee or any person, directly or indirectly connected with the applicant has not been granted registration by the Board under the Act, has in his employment at least one person who possesses the professional qualification in law from an institution recognised by the Government, any of its director or principal officer is or has at any time been convicted for any offence involving moral turpitude or has been found guilty of any economic offence, is a fit and proper person and fulfills the capital adequacy requirements.
- For the purpose of determining whether an applicant or the debenture trustee is a fit and proper person, the Board may take into account the criteria specified in Schedule II of the SEBI (Intermediaries)Regulations, 2008.
- No person can be entitled to act as a debenture trustee unless he is either a scheduled bank carrying on commercial activity or a public financial institution within the meaning under the Companies Act, 2013 or an insurance company or a body corporate.
- The capital adequacy requirement cannot be less than the net worth of INR 2 crores.
- The Board on being satisfied that the applicant is eligible, has to send an intimation to the applicant, within 1 month of such satisfaction, that it has been found eligible for grant of certificate of registration and grant a certificate in Form B.
- The certificate of registration granted is valid unless it is suspended or cancelled by the Board.
- The debenture trustee who has already been granted certificate of registration by the Board, prior to the commencement of the SEBI (Change in Conditions of Registration of Certain Intermediaries) (Amendment) Regulations, 2016 has to be deemed to have been granted a certificate of registration.
- Registration granted is subject to the following conditions, which are that where debenture trustee proposes change in control, it has to obtain prior approval of the Board for continuing to act as such after the change, it has to pay the fees for registration, in the manner provided in these regulations, it has to take adequate steps for redressal of grievances of the investors within 1 month of the date of the receipt of the complaint and keep the Board informed about the number, nature and other particulars of the complaints received and the manner in which such complaints have been redressed, it has to maintain capital adequacy requirements at all times, it has to abide by the regulations made under the Act in respect of the activities carried on by it as a debenture trustee and it has to immediately intimate the Board, details of changes that have taken place in the information that was submitted, while seeking registration.
- Where an application for grant of a certificate of registration does not fulfil the requirements set out, the Board has to reject the application after giving an opportunity of being heard.
- The refusal to grant registration has to be communicated by the Board within 30 days of such refusal to the applicant stating therein the grounds on which the application has been rejected.
- Any applicant may, being aggrieved by the decision of the Board, apply within a period of 30 days from the date of receipt of such intimation, to the Board for, reconsideration of its decision. On receipt of the application, the Board has to reconsider its decision and communicate its findings thereon as soon as possible in writing to the applicant.
- Where the debenture trustee fails to pay the fees as provided, the Board may suspend the certificate, whereupon the debenture trustee has to forthwith cease to act as a debenture trustee.
3. Responsibilities and Obligations of Debenture Trustees
- No debenture trustee who has been granted a certificate can act as such in respect of each issue of debenture unless he enters into a written agreement with the body corporate before the opening of the subscription list for issue of debentures, the agreement has to contain that the debenture trustee has agreed to act as such under the trust deed for securing an issue of debentures for the body corporate and the time limit within which the security for the debentures has to be created.
- No debenture trustee has to act as such for any issue of debentures in case it is an associate of the body corporate or it has lent and the loan is not yet fully repaid or is proposing to lend money to the body corporate.
- Subject to the provisions of any law every debenture trustee has to keep and maintain proper books of account, records and documents, relating to the trusteeship functions for a period of not less than 5 financial years preceding the current financial year.
- Every debenture trustee has to intimate the Board, the place where the books of account, records and documents are maintained.
- Every debenture trustee has to appoint a compliance officer who will 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 has to immediately and independently report to the Board, any non-compliance observed by him.
- The compliance officer has to report any non-compliance, of the requirements specified in the listing agreement with respect to debenture issues and debenture holders, by the body corporate to the Board.
- Every debenture trustee has to, as and when required by the Board submit the following information and documents, which includes the number and nature of the grievances of the debenture holders received and resolved, copies of the trust deed, non-payment or delayed payment of interest to debenture holders, if any, in respect of each issue of debentures of a body corporate, details of despatch and transfer of debenture certificates giving therein the dates, mode, etc. and any other particular or document which is relevant to debenture trustee.
- Where any information is called for, it is the duty of the debenture trustees to furnish such information.
3.2 Duties of the Debenture Trustees
- Call for periodical reports from the body corporate.
- Take possession of trust property in accordance with the provisions of the trust deed.
- Supervise the implementation of the conditions regarding creation of security for the debentures and debenture redemption reserve, wherever applicable.
- Enforce security in the interest of the debenture holders.
- Do such acts as are necessary in the event the security becomes enforceable.
- Carry out such acts as are necessary for the protection of the debenture holders and to do all things necessary in order to resolve the grievances of the debenture holders.
- Ascertain and satisfy itself that in case where the allotment letter has been issued and debenture certificate is to be issued after registration of charge, the debenture certificates have been despatched by the body corporate to the debenture holders within 30 days of the registration of the charge with the Registrar of Companies, debenture certificates have been despatched to the debenture holders in accordance with the provisions of the Companies Act, interest warrants for interest due on the debentures have been despatched to the debenture holders on or before the due dates and debenture holders have been paid the monies due to them on the date of redemption of the debentures.
- Ensure on a continuous basis that the property charged to the debentures is available and adequate at all times to discharge the interest and principal amount payable in respect of the debentures and that such property is free from any other encumbrances save and except those which are specifically agreed to by the debenture trustee.
- Exercise due diligence to ensure compliance by the body corporate, with the provisions of the Companies Act, the listing agreement of the stock exchange or the trust deed.
- To 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.
- To ascertain that the debentures have been converted or redeemed in accordance with the provisions and conditions under which they are offered to the debenture holders.
- Inform the Board immediately of any breach of trust deed or provision of any law.
- Appoint a nominee director on the Board of the body corporate in the event of 2 consecutive defaults in payment of interest to the debenture holders or default in creation of security for debentures or default in redemption of debentures.
- Communicate to the debenture holders on half yearly basis the compliance of the terms of the issue by the body corporate, defaults, if any, in payment of interest or redemption of debentures and action taken to obtain reports from the lead bank regarding progress of the project, monitor utilisation of funds raised in the issue, obtain a certificate from the issuer’s auditors 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.
4. Code of Conduct
- A debenture trustee has to make all efforts to protect the interest of debenture holders.
- A debenture trustee has to maintain high standards of integrity, dignity and fairness in the conduct of its business.
- A debenture trustee has to fulfill its obligations in a prompt, ethical and professional manner.
- A debenture trustee has to, at all times exercise due diligence, ensure proper care and exercise independent professional judgment.
- A debenture trustee has to take all reasonable steps to establish the true and full identity of each of its clients, and of each client’s financial situation and maintain record of the same.
- A debenture trustee has to ensure that any change in registration status/any penal action taken by the Board or any material change in financial position which may adversely affect the interests of clients/debenture holders is promptly informed to the clients and any business remaining outstanding is transferred to another registered intermediary in accordance with any instructions of the affected clients.
- A debenture trustee has to avoid conflict of interest and make adequate disclosure of its interest.
- A debenture trustee has to not divulge to anybody either orally or in writing, directly or indirectly, any confidential information about its clients which has come to its knowledge, without taking prior permission of its clients, except where such disclosures are required to be made in compliance with any law for the time being in force.
- A debenture trustee has to put in place a mechanism to resolve any conflict of interest situation that may arise in the conduct of its business or where any conflict of interest arises, shall take reasonable steps to resolve the same in an equitable manner.
- A debenture trustee has to make appropriate disclosure to the client of its possible source or potential areas of conflict of duties and interest while acting as debenture trustee which would impair its ability to render fair, objective and unbiased services.
- A debenture trustee cannot indulge in any unfair competition, which is likely to harm the interests of other trustees or debenture holders or is likely to place such other debenture trustees in a disadvantageous position while competing for or executing any assignment nor shall it wean away the clients of another trustee on assurance of lower fees.
- A debenture trustee cannot discriminate among its clients, except and save on ethical and commercial considerations.
- A debenture trustee has to share information available with it regarding client companies, with registered credit rating agencies.
- A debenture trustee has to provide clients and debenture holders with adequate and appropriate information about its business, including contact details, services available to clients, and the identity and status of employees and others acting on its behalf with whom the client may have to contact.
- A debenture trustee has to 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.
- A debenture trustee has to endeavour to ensure that inquiries from debenture holders are adequately dealt with, grievances of debenture holders are redressed in a timely and appropriate manner and where a complaint is not remedied promptly, the debenture holder is advised of any further steps which may be available to the debenture holder under the regulatory system.
- A debenture trustee has to make reasonable efforts to avoid misrepresentation and ensure that the information provided to the debenture holders is not misleading.
- A debenture trustee has to maintain required level of knowledge and competency and abide by the provisions of the Act, regulations and circulars and guidelines. The debenture trustee has to also comply with the award of the Ombudsman passed under the SEBI (Ombudsman) Regulations, 2003.
- A debenture trustee cannot make untrue statements or suppress any material fact in any documents, reports, papers or information furnished to the Board.
- A debenture trustee or any of its directors, partners or manager having the management of the whole or substantially the whole of affairs of the business, cannot either through its account or their respective accounts or through their associates or family members, relatives or friends indulge in any insider trading.
- A debenture trustee has to ensure that the Board 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 the Board or of any other regulatory body.
- A debenture trustee or any of his employees cannot render, directly or indirectly, any investment advice about any security in the publicly accessible media, whether real-time or non-real-time unless a disclosure of his interest including long or short position in the said security has been made, while rendering such advice. In case, an employee of the debenture trustee is rendering such advice, the debenture trustee has to ensure that he discloses his interest, the interest of his dependent family members and that of the employer, including their long or short position in the said security, while rendering such advice.
- A debenture trustee has to ensure that any person it employs or appoints to conduct business is fit and proper and otherwise qualified to act in the capacity so employed or appointed (including having relevant professional training or experience).
- A debenture trustee has to ensure that it has adequate resources to supervise diligently and does supervise diligently persons employed or appointed by it to conduct business on its behalf.
- A debenture trustee has to have internal control procedures and financial and operational capabilities which can be reasonably expected 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.
- A debenture trustee is responsible for the acts or omissions of its employees and agents in respect to the conduct of its business.
- A debenture trustee has to provide adequate freedom and powers to its compliance officer for the effective discharge of its duties.
- A debenture trustee has to ensure that the senior management, particularly decision makers have access to all relevant information about the business on a timely basis.
- A debenture trustee has to ensure that good corporate policies and corporate governance is in place.
- A debenture trustee has to develop its own internal code of conduct for governing its internal operations and laying down its standards of appropriate conduct for its employees and officers in the carrying out of their duties. Such a code may extend to the maintenance of professional excellence and standards, integrity, confidentiality, objectivity, avoidance of conflict of interests, disclosure of shareholdings and interests.
- A debenture trustee cannot be party to creation of false market, price rigging or manipulation or passing of unpublished price sensitive information in respect of securities which are listed and proposed to be listed in any stock exchange to any person or intermediary.
- A Guide to the SEBI (Collective Investment Schemes) Regulations, 1999 - May 12, 2020
- A Guide to the SEBI (Credit Rating Agencies) Regulations, 1999 - May 12, 2020
- A Guide to SEBI Debenture Trustees Regulations, 1993 - May 12, 2020