What Is The Role Of A Debenture Trustee In Bond Issuances?

Non-Convertible Debentures (NCDs) or simply ‘Debentures’ are long-term debt instruments issued by companies to raise funds from the public or institutions. These are also commonly referred to as ‘Bonds’. A debenture trustee is an independent third party appointed by the company to safeguard the interests of debenture holders. Debenture trustees play a critical role in ensuring that the terms and conditions of the debenture are followed, and debenture holders’ rights are protected.

Role of a Debenture Trustee

1. The primary responsibility of a debenture trustee is to protect the interests of debenture holders. Debenture trustees ensure that the company issuing the debenture fulfills its obligations under the debenture’s terms and conditions. They also ensure that debenture holders receive timely payments of interest and principal.
2. In addition to this, one of the significant responsibilities of a debenture trustee is to monitor the issuing company’s performance. They keep a close watch on the company’s financial health, profitability, and liquidity. If the company’s performance deteriorates, the debenture trustee may take appropriate action to protect the interests of debenture holders.
3. A debenture trustee also holds security on behalf of debenture holders. They ensure that security is properly maintained and enforced if the company defaults on its obligations. (E.g. 1.25x times security to be maintained of the principal amount). In case of default by the company, the debenture trustee may take legal action on behalf of the debenture holders. This includes initiating legal proceedings to recover the outstanding amount or enforcing the security provided by the company. Without security creation, debentures cannot be listed in the exchanges.
4. Debenture trustees also have the responsibility to provide debenture holders with all the necessary information about the debenture. This includes information about the interest rate, the maturity date, and the security provided by the company. The debenture trustee also communicates with debenture holders on behalf of the company issuing the debenture.

The following are some other roles and responsibilities of a debenture trustee:

• Allotment of NCDs within 2 working days from the issue closure date
• Request regular reports from the debenture-issuing company
• Ensure listing of NCDs within stipulated days of the Issue closure date
• Take custody of trust assets as specified in the trust deed
• Continuously verify that the property pledged as security for the debentures is adequate to cover interest and principal payments
• Ensure the issuing company is adhering to relevant laws and agreements, such as the Companies Act, listing agreements, and trust deeds
• Promptly take appropriate steps to protect debenture holders’ interests in the event of any trust deed or legal breaches
• Call for periodical compliances on a quarterly and half-yearly basis from the issuer
• Continuous monitoring of interest/principal payment and escrow accounts, if any
• Monitoring of covenants under transaction documents
• Ensure the creation of a Recovery Expense Fund (REF)
• Confirm that debentures are converted or redeemed according to their terms and conditions
• Immediately notify the board of any breaches of trust deeds or laws
• Communicate with debenture holders bi-annually regarding the company’s compliance with issue terms, any defaults, and other relevant information

Debenture Trustee’s Role in the event of default

1. Intimation to the investor on the occurrence of the event of default
2. Appointment of nominee director in case of:
   • 2 consecutive payment defaults, default in security creation, default in redemption
   • Call for meetings of Debenture Holders
3. Entering into Inter-creditor Agreement on the instructions of the Investor with other secured creditors
4. On the instruction of the majority of debenture holders, initiation of enforcement carried out through the IBC route and or SARFAESI
5. Representing the Investor in committee of creditors meetings, conducting e-voting on the instruction of investors and addressing their queries on a timely basis
6. Tracking of Investor grievances via SCORES platform
7. Enforcing the security on instructions of the Investor or taking possession post requisite approval/permission
8. Distribution of the recovery amount as per the settlement proceeds

Conclusion

The appointment of a debenture trustee is mandatory as per the provisions of the Companies Act, 2013. A debenture trustee plays a crucial role in ensuring the interests of debenture holders are protected. They act as a link between the company issuing the debenture and the debenture holders, ensuring that the terms and conditions of the debenture are followed. The debenture trustee’s role includes safeguarding the interests of debenture holders, monitoring the company’s performance, enforcing security, providing information to debenture holders, and taking legal action in case of default by the company.

FAQs

Q. What is SARFAESI?

A. (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest) is a law that allows banks and financial institutions to recover their non-performing assets by selling the assets of the borrower without the intervention of a court.

Q. What is Recovery Expense Fund (REF)?

A. REF was enforced by SEBI in 2020. If an issuer defaults and the Debenture Trustee is required to take action, some funds must be available. The issuer has to maintain 25 lacs in the REF.

Q. What is IBC?

A. IBC (Insolvency and Bankruptcy Code) is a law that provides a time-bound process for resolving insolvency and bankruptcy cases transparently and efficiently.

Q. What is SCORES?

A. (SEBI Complaints Redress System) is an online platform by SEBI for investors to lodge complaints against listed companies and intermediaries and track their status.

Q. How is a debenture trustee appointed?

A.  A debenture trustee is appointed by the issuer of the debentures and must be registered with the Securities and Exchange Board of India (SEBI).

Q. Why is the debenture trustee appointed?

A.  Debenture trustees are appointed to protect the interests of the debenture holders. They act as an intermediary between the issuer and the debenture holders. Their primary role is to ensure that the issuer complies with the terms and conditions of the debenture agreement.

Disclaimer: Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully.