DEBENTURE TRUST AND TRUSTEES

In last post here, we discussed some provisions relating to Debentures. Now, we will study other provisions related to Debenture Trust under the Companies (Share Capital and Debentures) Rules 2014.

Debenture Trustee:

The company shall appoint debenture trustees, after complying with the following conditions, namely:-

(a) The names of the debenture trustees shall be stated in letter of offer inviting subscription for debentures and also in all the subsequent notices or other communications sent to the debenture holders;

(b) Before the appointment of debenture trustee or trustees, a written consent shall be obtained from such debenture trustee or trustees proposed to be appointed and a statement to that effect shall appear in the letter of offer issued for inviting the subscription of the debentures;

(c) A person shall not be appointed as a debenture trustee, if he-

(i) beneficially holds shares in the company;

(ii) is a promoter, director or key managerial personnel or any other officer or an employee of the company or its holding, subsidiary or associate company;

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

(iv) is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company;

(v) has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon;

(vi) has any pecuniary relationship with the company amounting to two per cent. or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;

(vii) is relative of any promoter or any person who is in the employment of the company as a director or key managerial personnel

(d) The Board may fill any casual vacancy in the office of the trustee but while any such vacancy continues, the remaining trustee or trustees, if any, may act. Where such vacancy is caused by the resignation of the debenture trustee, the vacancy shall only be filled with the written consent of the majority of the debenture holders.

(e) Any debenture trustee may be removed from office before the expiry of his term only if it is approved by the holders of not less than three fourth in value of the debentures outstanding, at their meeting.

Duty of Debenture Trustee:

It shall be the duty of every debenture trustee to-

(a) Satisfy himself that the letter of offer does not contain any matter which is inconsistent with the terms of the issue of debentures or with the trust deed;

(b) Satisfy himself that the covenants in the trust deed are not prejudicial to the interest of the debenture holders;

(c) Call for periodical status or performance reports from the company;

(d) 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 therefor;

(e) 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 creation of security for debentures; or

(iii) Default in redemption of debentures.

(f) Ensure that the company does not commit any breach of the terms of issue of debentures or covenants of the trust deed and take such reasonable steps as may be necessary to remedy any such breach;

(g) Inform the debenture holders immediately of any breach of the terms of issue of debentures or covenants of the trust deed;

(h) Ensure the implementation of the conditions regarding creation of security for the debentures, if any, and debenture redemption reserve;

(i) 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;

(j) Do such acts as are necessary in the event the security becomes enforceable;

(k) Call for reports on the utilization of funds raised by the issue of debentures-

(l) Take steps to convene a meeting of the holders of debentures as and when such meeting is required to be held;

(m) Ensure that the debentures have been converted or redeemed in accordance with the terms of the issue of debentures;

(n) Perform such acts as are necessary for the protection of the interest of the debenture holders and do all other acts as are necessary in order to resolve the grievances of the debenture holders.

Debenture Trust Deed:

A trust deed in Form No SH – 12 or as near thereto as possible shall be executed by the company issuing debentures in favour of the debenture trustees within sixty days of allotment of debentures.

Trust Deed as Public Document:

(a) A trust deed for securing any issue of debentures shall be open for inspection to any member or debenture holder of the company, in the same manner, to the same extent and on the payment of the same fees, as if it were the register of members of the company; and

(b) A copy of the trust deed shall be forwarded to any member or debenture holder of the company, at his request, within seven days of the making thereof, on payment of fee.

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