Rights and liabilities of the entity that acts as the holder of debenture stock for the interest of another party
A debenture is a type of formal loan given to the company by another individual. The company is then under an obligation to reimburse the loan within a specified period of time with interest.
A debenture trustee is an individual who is responsible for issuing and distribution of debentures. He/she is a person or entity that acts as the holder of debenture stock for the interest of another party. When a company is thinking about raising capital, one of the methods of doing so is by issuing stock in the form of debt with the obligation to reimburse the debt at a specific interest rate. The trustee acts as a liaison (a person who keeps in touch with different groups) between the company that provided the debentures and the holders of the debenture who are collecting interest payments.
Following the SEBI Rules, 1993- “debenture trustee” is a trustee of a trust deed for obtaining any issue of debentures of a body corporate [section 2 (bb)]. This is applicable to public companies only.
Eligibility for a debenture trustee
To serve as a debenture trustee, the entity must either be a scheduled bank carrying on commercial activity, a public financial organization, an insurance company, or a corporate body. The entity must be registered with SEBI to act as a debenture trustee. All appointment of the debenture trustee(s) should be made under section 71 of the Companies Act, 2013.
Rights
- A company cannot issue debentures prior to the appointment of a debenture trustee in any case.
- The company cannot issue debentures previous to obtaining the assent of the debenture trustee.
- The company has to particularize the name of the debenture trustee in the recommendation letter.
- The debenture trustee can ask for regular performance report of the company
- The trustee can ask for reports related to the use of funds raised through the issue of debentures.
- The trustee can immediately communicate the debenture holders’ defaults, if any, regarding the payment of interest or recovery of debentures and consequently the action taken by the trustee.
- The trustee can designate a nominee to board of director of the company.
- Before the trustee designates the nominee the following conditions must be satisfied: 1. Two consecutive non-payment of interest to the debenture holders or
2. Default information of security for debentures or default in the recovery of debentures
Liabilities
- No one can be nominated as a debenture trustee if he has a share in ownership in the company.
- He cannot be appointed if he is a proponent of the company, an employee or the manager.
- No appointment for Creditor to the business.
- The post of the debenture can be filled by the company with the consent of the other trustees.
Duties
- The trustee makes sure that there is no contravention in the terms of issuance of debentures.
- The debenture trustee can take steps to provide a remedy for the breach.
- The trustee is the person who makes the debenture holders aware of such contravention.
- The trustee makes sure that all the condition with regard to the creation of security for debentures is met
- The trustee summons the gathering between the company and the debenture holders
- The trustee is an individual who assures that the debentures are retrieved as per the conditions agreed upon.
- The trustee can take steps to sort out the dispute arising between the company and the holders
- The trustee has to take essential steps to assure the interest of the debenture holders are met.