Debenture trustee

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Kumar Nayudu (Querist)
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27 December 2012 what is debenture trustee? which it is appointed by whom? will you give a brief explanation regarding this!
thanks and regards.

Ajay Mishra

Ajay Mishra (Expert)
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27 December 2012 Hi

Secured debentures shall be issued with the trust deed
The issue of debentures is generally secured by a debenture trust deed by which the property forming the security is charged by way of mortgage to the trustees. The trust deed provides the terms and conditions on which the charge is held and may be enforced. The debenture trust deed shall be executed within six months of the closure of the issue.

Execution of debenture trust deed brings a plethora of benefits both for the debentureholders and the company.
Sections 117A, 117B and 117C of the Companies Act, 1956 relating to Debentures. Trust Deed

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Ajay Mishra

Ajay Mishra (Expert)
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27 December 2012 Debenture trust deed
Section 117A of the Act deals with Debenture Trust Deed. The provisions are as under:—
— a trust deed for securing any issue of debentures shall be in such form and shall be executed within such period as may be prescribed;
— a copy of the trust deed shall be open to inspection to any member or debenture holder of the company and he shall also be entitled to obtain copies of such trust deed on payment of such sum as may be prescribed;
— if a copy of the trust deed is not made available for inspection or is not given to any member or debentureholder, the company and every officer of the company who is in a default, shall be punishable, for each offence, with fine which may extend to five hundred rupees for every day during which the offence continues.
Pursuant to Reg. 14 of the SEBI Debenture Trustee Regulations, the Debenture Trust shall ensure that the Trust Deed contains the matters specified in the Schedule IV to the said Regulations. In this connection it may be noted that the Central Government is expected to make Rules containing a model Trust Deed.
Where the requirements set out in a debenture trust deed were basically for the company's benefit and administrative convenience, the company would be entitled to waive the requirement imposed for its benefit.

Ajay Mishra

Ajay Mishra (Expert)
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27 December 2012
Appointment, functions and duties of debenture trustee:

Section 117B of the Act deals with the terms of appointment and duties of the debenture trustee which may be discussed as under:—
(a) Compulsory appointment of debenture trustees.—No company shall issue a prospectus or a letter of offer to the public for subscription of its debentures, unless the company has, before such issue, appointed one or more debenture trustees for such debentures and the company has, on the face of the prospectus or the letter of offer, stated that the debenture trustee or trustees have given their consent to the company to be so appointed:
Provided that no person shall be appointed as a debenture trustee, if he—
(i) beneficially holds shares in the company;
(ii) is beneficially entitled to moneys which are to be paid by the company to the debenture trustee;
(iii) has entered into any guarantee in respect of principal debts secured by the debentures or interest thereon.
(b) Functions of debenture trustees.—Subject to the provisions of this Act, the functions of the debenture trustees shall generally be to protect the interest of holders of debentures (including the creation of securities within the stipulated time) and to redress the grievances of holders of debentures effectively.
(c) Duties of debenture trustees.—In particular, and without prejudice to the generality of the foregoing functions a debenture trustee may take such other steps as he may deem fit—
(i) to ensure that the assets of the company issuing debentures and each of the guarantors are sufficient to discharge the principal amount at all times;
(ii) to satisfy himself that the prospectus or the letter of offer does not contain any matter which is inconsistent with the terms of the debentures or with the trust deed;
(iii) to ensure that the company does not commit any breach of covenants and provisions of the trust deed;
(iv) to take such reasonable steps to remedy any breach of the covenants of the trust deed or the terms of issue of debentures;
(v) to take steps to call a meeting of holders of debentures as and when such meeting is required to be held.
Section 117B(4) provides that where at any time the debenture trustee comes to a conclusion that the assets of the company are insufficient or are likely to become insufficient to discharge the principal amount as and when it becomes due, the debenture trustee may file a petition before the Tribunal and the Tribunal may, after hearing the company and any other person interested in the matter, by an order, impose such restrictions on the incurring of any further liabilities as that Tribunal thinks necessary in the interests of holders of the debentures.

Ajay Mishra

Ajay Mishra (Expert)
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27 December 2012
Liability of company to create security and debenture redemption reserve:

Section 117C of the Act, 1956 deals with 'liability of company to create security and debenture redemption reserve' which has been provided as under:—
(a) Creation of debenture redemption reserve.—Where a company issues debentures after the commencement of this Act, it shall create a debenture redemption reserve for the redemption of such debentures, to which adequate amounts shall be credited, from out of its profits every year until such debentures are redeemed.
(b) Utilisation of reserve.—The amounts credited to the debenture, redemption reserve shall not be utilised by the company except for the purpose aforesaid.
The Department of Company affairs has clarified vide General Circular No. 9/2002 No. 6/3/2001-CL.V, dated 18-4-2002 that one of the measures that the Central Government took to protect the interests of small investors in Companies Act was to insert section 117C in the Companies (Amendment) Act, 2000 which contemplates the creation of security and liquidity to ensure timely repayment by companies on redemption of debentures and thereby afford protection to the debentureholders.
Section 117C requires every company to create a Debenture Redemption Reserve (DRR) to which 'adequate amounts' shall be credited out of its 'profits' every year until such debentures are redeemed, and shall utilise the same exclusively for redemption of a particular set or series of debentures only. Thus, the quantum of DRR to be created before the redemption liability actually arises in normal circumstances should be 'adequate' to pay the value of debentures plus accrued interest (if not already paid), till the debentures are redeemed and cancelled. Since the section requires that the amount to be credited as DRR will be carved out of profits of the company only, there is no obligation on the part of the company to create DRR if there is no profit for the particular year.
The Department of Company Affairs (DCA) has received a number of representations from Public Financial Institutions, Non-Banking Financial Companies, Professionals, FICCI, CII, Chambers, etc. seeking clarifications in this regard.
The matter was considered keeping in view the purpose of the introduction of section 117C and the genuine problems likely to be caused to the NBFCs, All India Financial Institutions (AIFIs) and banks that deal in financial products and would find it difficult to create DRR after transferring 20% of the profits to Reserve Fund out of the divisible profits as already required by RBI norms.
After taking into consideration the RBI directions/regulation on prudential norms applicable to banking companies, AIFIs and NBFCs, and the SEBI (Disclosure and Investor Protection) Guidelines, 2000, the Government hereby clarifies on adequate DRR and other related matters as under:—
(i) No DRR is required for debentures issued by All India Financial Institutions (AIFIs) regulated by Reserve Bank of India and Banking Companies for both public as well as privately placed debentures. For other FIs within the meaning of section 4A, DRR will be as applicable to NBFCs registered with RBI.
(ii) For NBFCs registered with the RBI under section 45-IA of the RBI (Amendment) Act, 1997, 'the adequacy' of DRR will be 50% of the value of debentures issued through public issue as per present SEBI (Disclosure and Investor Protection) Guidelines, 2000 and no DRR is required in the case of privately placed debentures.
(iii) For manufacturing and infrastructure companies, the adequacy of DRR will be 50% of the value of debentures issued through public issue and 25% for privately placed debentures.
(iv) Section 117C will apply to debentures issued and pending to be redeemed and as such DRR is required to be created for debentures issued prior to 13-12-2000 and pending redemption subject to clarifications issued herein.
(v) Section 117C will apply to non-convertible portion of debentures issued whether they are fully or partly convertible.

Kumar Nayudu

Kumar Nayudu (Querist)
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27 December 2012 thank you sir.how can i contact you?

Ajay Mishra

Ajay Mishra (Expert)
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27 December 2012 my email id is

ajaygkp@gmail.com

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