Authored by Pulkit Tiwari
Keywords: debenture, trustees, company, business
In today’s time money is the key player in almost every aspect and it gains a lot more importance in the field of business. So any new technique or method which mentions about saving money to a greater extent than the previous one’s are always welcomed whether it is legal or illegal. This ideology of acceptance of a new better method has changed the business paradigm to a greater scope as compared to its initiation.
A big corporation or a small-scaled company needs an active flow of money in their business circuit and sometimes it so happens that they need the money but they don’t have it. The earlier idea then was to approach the bank and borrow a business loan so that business is not affected. The problem then so arrived was that the interest that the companies had to give to the banks seemed a lot. So a method was needed which performed the function of the bank but with a lesser interest than banks or maybe so that the interest might be in the hands of the companies. This led to the rise of the concept of the debenture.
To escape the interest rates but still be able to get the continuous flow of money in the business circuit there exists the concept of debenture. Debenture is an instrument which company uses to acquire loans from the normal citizens. The interest rate and the conditions are here fixed by the companies itself.
This is the main advantage of debenture i.e. the businesses have hold of the conditions whereas while borrowing money from the bank the conditions are put forth by the bank. Debenture is the thing which is kept on hold by the people whose money the company/companies have borrowed. These citizens are called debenture holders and to protect the interests of the debenture holders debenture trustees are appointed.
About debenture trustee
Following mentioned can only be qualified to act as a debenture trustee:
· A registered bank carrying on a commercial activity; or
· A public financial institution; or
· An insurance company; or
· A body corporate.
For an applicant to apply as a debenture trustee he/she is required to pay a non-refundable sum of Rs 50,000 to SEBI. Then for an initial registration a sum of Rs 20 lakh which grants a tenure of 5 years and then to gain permanent registration a further sum of Rs 9 lakh is given after the end of initial 5 years. The applicant should apply for the permanent registration three months prior to the expiry of the initial registration. A sum of Rs 9 lakh should be given every three subsequent years for the permanent registration status to be in force.
There are certain registrations conditions which have to be followed:
· A pre-approval of the board when a change in control is proposed;
· fees only to be paid in the manner mentioned in the regulations;
· to abide by the regulations mentioned under the act;
· to maintain money adequacy requirement mentioned in the regulations;
As per the provisions of the law whenever a debenture contract takes place appointment of the debenture trustee under the mentioned conditions is important, however issuance of debentures for 18 months or less does not compulsorily require a debenture trustee.
It is important to note that the debenture trustee should be registered with Securities and Exchange Board of India (SEBI). The SEBI (Debenture Trustee) Regulations, 1993 govern the Debenture Trustee.
Debenture trustee should be independent of the issuing company i.e. it should not have any connection or relation to the issuing company. A Debenture trustee cannot ever act for issuance of debenture of its associates.
The debenture trustee is appointed by the issuer company. The company finalizes a debenture company as per the conditions given above then the company calls for a board meeting in which they enter into a consensus with the debenture trustee. The payment to the debenture company is done by the issuing company.
Contents of the Trust Deed:
· A preamble at the start mentioning both i.e. the rights of the debenture holders as well as of the debenture trustee and how these rights came to be vested;
· A complete and unambiguous description of the instrument. Mandatory mentions in the instrument are the purpose, amount, tenure, interest, etc;
· The details of the charged securities which exist or may exist in future;
· A section mentioning the types of default possible and what the debenture trustee should do in those defaults;
· The obligations that the company owes to the debenture holders and to the debenture trustee;
Roles and responsibilities of Debenture Trustee:
· protect the interest of the debenture holders;
· keep a strict periodic check on the reports of the issuing company;
· take possession of the trust property by provisions of the trust deed;
· take applicable measures to guard the interest of the debenture holders in case of any breach of the instrument i.e. trust deed or law;
· ensure that the debentures have been transformed or ransomed as per the provisions and conditions underneath that they are provided to debenture holders;
· enforce security measures in the interest of the debenture holders in case of any default by moving to assets for collection of debt owed by the issuing company to the debenture holders;
· ensure at all times that the property charged to the debenture is free from any other claim except those specifically concorded with the debenture holder and that the property is available and adequate to discharge the interest and the principal amount payable in respect of the debentures;
· exercise due diligence to form certain surety that the issuer company is compliant with provisions of the Companies Act, the listing agreement of the stock exchange, or the trust deed;
· inform the Board instantaneously in case of any breach of the instrument i.e. trust deed or provision of any law;
· appoint a nominee director on the board of issuer entity when required. A nominee director can be appointed in case of below happenings:
Ø Two consecutive non-payment of interest to debenture holder; or
Ø Failure in the creation of security for debentures; or
Ø Failure in the redemption of debt.
The importance of debenture trustee can be seen in the article. The debenture trustee is vested with vital powers and therefore laws have been created so that the individual does not take undue advantage of the power vested. The appointment of the debenture trustee has to be done with utmost importance because a person which a bad conscience can create troubles for the company. Debenture trustee should be a person who is on alert and keeps the issuing company on checks and if any wrong found should balance it with the proper legal measures mentioned.