Trustees must keep eye on finances of debt-issuing cos

A lack of due diligence to see-through the financial un-worthiness of debt-issuing companies can lead debenture trustee-entities like banks that oversee such issuance into trouble.

In what would call for greater accountability for debenture trustees, the National Consumer Disputes Redressal Commission (NCDRC) has held that failure by such trustees to ensure that the debt issuers maintain their asset adequacy in respect to the debts issued, was a deficiency of service on their part.

This order empowers investors to drag debenture trustees to consumer courts for quick redressal of their grievances, rather than take a costly and time-consuming regular litigation route.

The order is based on a premise that in cases where debenture trustees fail to conform to their legal obligations as specified under the company law and Sebi regulations, they shall be held guilty of deficiency in services. According to Sebi provisions, trustees are required to ensure that the company which issues debentures has sufficient funds and property to repay the redemption amounts of the debt securities and payment of interest.

The apex consumer panel was hearing six petitions filed by the Central Bank of India challenging separate decisions by state consumer commissions that held the bank guilty of deficient service. In all the cases, it was alleged that the bank in its capacity as debenture trustees had failed to ensure due diligence towards protecting the investor’s interests.

“The petitioner (Central Bank of India) ought to have discharged its duty as a professional corporate trustee and if the loss was caused to the debenture holders due to its deficiency in not taking special care and in not exercising its special expertise as a corporate trustee, which it professes, then it is liable for its deficiency in service,” said an NCDRC bench headed by its president M B Shah