Debenture trust deed – iPleaders

This article has been written by Jaanvi Jolly. In this article, we will explore the concept of the debenture trust deed and its importance in corporate financing. The meaning and usage of ‘debentures’ and ‘trust deed’ have been discussed. The question ‘how to draft a debenture trust deed?’ has also been answered!

Introduction 

When you are lending money to someone, you would want some form of security to ensure that your loan is repaid, isn’t it? The same principle would apply when debenture holders lend money to an issuing company. Here, in this case, since the debenture holders are creditors, their concern goes beyond just ensuring payment of interest. They also want to make sure that the principal amount is repaid on maturity.

This is where the debenture trust deed comes into the picture! It’s an agreement between the issuer company and the debenture holder. The primary purpose of the debenture trust deed is to safeguard the interests of the debenture holders.

But what is a ‘debenture trust deed’? In this article, we will not only be breaking down the concept of a debenture trust deed but will also answer questions like ‘What is a debenture?’, ‘Who is a debenture holder?’, ‘What terms does a debenture trust deed have?’ etc. 

By the time you finish reading this piece, you will be all set to draft a debenture trust deed!

The next question arises: which individuals need knowledge of debenture trust deeds, and who utilises them?

This legal document is often used by companies or bodies. It can be understood as an agreement between the company and the trustees, who are appointed to safeguard the interests of debenture holders before the debentures are offered for public subscription.

To make sense of this definition, we will first begin by understanding the concept of ‘debentures’ along with allied concepts like stocks, etc.

Exploring the world of debentures

Are you someone interested in trading? 

Do you have some knowledge about the stock market? 

Don’t worry if you don’t, we will start from the basics! You must be aware of the concept of stocks, it is a share in a big company in exchange for a certain amount.

For example, if you want 1 share in Reliance Industries, it would cost you around 2500 and in Tata Motors, it would cost you around 800. 

But why would a big company, say, Tata Motors, offer to sell a share of their company? 

The answer is to raise money. So, like stocks, even debentures are tools to get capital. 

But what is the difference between a stock and a debenture? Read on to know!

Stocks vs. debentures

Let’s quickly look over the brief differences between the concept of stocks and debentures via a table:

Categories	Stocks	Debentures
Nature	It gives you a part ownership of the company.	It’s only a transaction where you lend money to the company.
Returns	You get returns in terms of dividends and capital gains.	You get returns in terms of periodic interest and principal amount.
Risks	These are market-dependent and, therefore, are highly risky.	These offer fixed payments and are, therefore, low-risk investments.
Tenure	No fixed tenure.	Has a fixed maturity date.

After getting a brief idea about the difference between stocks and debentures, which one would you pick: owning shares in a big company or being a creditor to a large conglomerate?

Well, if you want a fixed return, go for debentures, but if you want to own a share in your favourite company, go for equity stocks!

Features of debentures

A debenture can be understood as a debt instrument, i.e. an instrument by which a company acquires a debt. The investors give the company loans in return for a fixed amount along with periodic interest payments, also known as coupon payments. Therefore, when you invest in a debenture, you lend money to the company and become its creditor.

The flow chart above depicts the transaction between the company issuing debentures and the creditor or debenture holder. While the investor gives a loan to the company, in return, he gets periodic interest along with his principal amount after a fixed period.

Now let’s look into some essential features of a debenture:

It’s a debt instrument

Debentures are a mode of borrowing money by the issuing company. Through debentures, they borrow money from the investors with a promise to pay the interest periodically as well as the principal amount on maturity.

It has a fixed maturity period

The debentures are generally issued with a fixed maturity date. Once the maturity date arrives, the issuer company is bound to pay the principal amount to the debenture holders. Only irredeemable or perpetual debentures do not have a maturity date.

It has a provision for redemption

The repayment of the principal amount is known as redemption. So, when an issuing company, on the arrival of the maturity date, pays the principal amount, it redeems the debentures. In the case of callable debentures, the issuer company can redeem them before the maturity period.

No ownership rights are given to debenture holders

Unlike shareholders, debenture holders do not have any ownership rights in the company. They only have a claim on the interest as well as the principal amount.

Priority in case of liquidation

In case the company is liquidated, the debenture holders have priority over the equity holders. Since they are considered the creditors of the company and must be repaid before shareholders.

Credit rating of debentures

Debentures are rated by credit rating agencies like CRISIL, ICRA, etc. These reflect the risk of default and influence the interest rate offered on the debentures.

‘Debenture’ is not a simple singular concept. A lot of permutations and combinations have evolved in it. Let’s understand these various types of debentures next!

World of debentures: types of debentures

As we understood in the previous section, debentures are debt instruments in which a company borrows money from its investors, with a promise to pay back with periodic interest. 

The next question that would pop into our minds is whether interest rates are fixed. No, there isn’t a straight-jacket rule for interest rates. It depends on the terms and conditions as agreed upon by the parties.

Sometimes the interest rate is fixed, other times it fluctuates. At times, the debentures come with an option of convertibility and other times not. These different terms depend upon the type of debenture issued. In the next segment, let’s explore the different types of debentures. 

Secured debentures: the guardian warriors 

As the name suggests, secured debentures are secured/backed by specific assets of the company. These assets are called collateral. This is similar to when we take loans, we often need to give the bank some security. 

The purpose of this collateral is to provide a layer of security for the creditor. In case of default in payment by the company, the amount can be claimed through the collateral security.

For example, imagine Adidas issues debentures and charges its land situated in Gurgaon as security in case of default in payment on maturity of the debenture.

Unsecured debentures: the trust builders

On the other hand, unsecured debentures are like the money we lend to our friends! Based on their creditworthiness and our trust that they would pay us back. 

Unsecured debentures are also known as ‘naked debentures’. Additionally, no collateral security is provided. The debenture holders invest their money based on the goodwill and creditworthiness of the company. These are higher-risk debentures and therefore offer higher interest rates.

For example, imagine Adidas issues debentures and does not provide any security in case of default in payment on maturity of the debenture.

Convertible debentures: the chameleons 

As discussed above, equity shares offer the investors a share in ownership, while debentures do not! But what if I tell you, in the case of convertible debentures, the investors can convert their debentures into equity shares in the company, after a specific period?

Section 71(1) of the Companies Act, 2013 deals with convertible debentures.

For example, Tata Motors issues debentures and offers an option to convert these into equity stocks after a period of five years.

Non-convertible debentures: cash flow incoming

Non-convertible debentures do not offer the option to convert debentures into equity shares. They remain as debentures till their maturity and offer interest payments only.

For example, Tata Motors issues debentures and provides a fixed maturity date for redemption. They offer no option to convert these into equity stocks after a period of time.

Floating rate debentures: the flexible friend 

Feeling adventurous? Why stick to fixed rates? Pick the floating rates. These flow with the flow of the market and therefore are dynamic.

For example, Adani Enterprises issues debentures and offers a floating rate of interest on its debentures. This means that the interest rate is paid periodically, depending on the market rate of the company.

Fixed-rate debentures: the safe bird

These are the ones for the safe birds. You want a fixed amount that you receive monthly or annually, irrespective of the bearish or bullish market trends. 

For example, Adani Enterprises issues debentures and offers a fixed rate of interest on those debentures, say 5% annually.

Perpetual debentures: linked forever

Perpetual debentures are also called irredeemable debentures. These can be understood as lifelong commitments! They are like a lifetime supply for financial gains!

These debentures cannot be redeemed as long as the company is alive. In other words, you can only redeem them at the dissolution of the issuing company.

In case the company becomes insolvent, these debentures ensure that the debenture holders are repaid first.

For example, Reliance offers perpetual debentures, which do not have a maturity date and can be redeemed when the company dissolves. Till that time, the debenture holders would enjoy periodic interest payments. 

Callable debentures: the ticking timers 

In contrast to perpetual debentures, callable debentures are known as redeemable debentures. The issuer can redeem these before the date of maturity. 

For example, Reliance offers callable debentures, they do have a maturity date, say 5 years. However, these can be redeemed by the company at any time before the maturity date. 

Comparative analysis of types of debentures

Secured debentures vs. Unsecured debentures

Here, we would be differentiating between secured and unsecured debentures.

Secured debentures	Unsecured debentures
Secured debentures are secured/ backed by specific assets of the company. These assets are called collateral.	Unsecured debentures are based on the creditworthiness of the company, and no collateral security is provided.
The purpose of this collateral is to provide a layer of security for the creditor.	These are also known as ‘naked debentures’.
In case of default in payment by the company, the amount can be claimed through the collateral security.	These are higher-risk debentures and therefore offer higher interest rates.

Convertible debentures vs. Non-convertible debentures

Here we will be pointing out the differences between convertible and non-convertible debentures.

Convertible debentures	Non-convertible debentures
In the case of convertible debentures, the investors can convert their debentures into equity shares in the company after a specific period.	Non-convertible debentures do not offer the option to convert debentures into equity shares. They remain as debentures till their maturity and offer interest payments only.

Floating-rate debentures vs. Fixed-rate debentures

In this part, we will be discussing the differences between floating-rate debentures and fixed-rate debentures.

Floating rate debentures	Fixed-rate debentures
The interest rates in these flows with the changes in the market and therefore, are dynamic.	In these, you receive a fixed amount that you receive monthly or annually, irrespective of the bearish or bullish market trends.

Perpetual debentures vs. Callable debentures

Now we will be discussing the differences between perpetual debentures and callable debentures.

Perpetual debentures	Callable debentures
These debentures cannot be redeemed as long as the company is alive. In other words, you can only redeem them at the dissolution of the issuing company.	These debentures are known as redeemable debentures. The issuer can redeem these before the date of maturity.

Each of these debentures is suited for issuers and debentures with different needs. These offer varied investment goals and risk appetites! 

Choose as you like!

Understanding the role of a trust deed

Before we understand what a trust deed is, let’s break down what a ‘trust’ means.

I am sure you would have heard about Being Human. Yes, the one associated with Salman Khan. So, Being Human is a trust for helping the cause of the underprivileged. This is an example of a public trust.

There is also a private trust. For instance, a father creates a trust for his children and makes his wife the trustee. The trust is created for the benefit of the children, and the mother is responsible for taking care of it.

In general terms, a trust can be understood as a formal arrangement where property is transferred from a person to a trustee who has full control over that property but must hold it for the benefit of the beneficiaries.

A deed creating such a trust is called a trust deed.

Usually, a trust deed has three parties: the settler (creates the trust), the trustee and the beneficiary. 

Putting the debenture and trust deed together, we get a debenture trust deed

Now that we have understood the meaning of a trust deed, let’s decipher what exactly a debenture trust deed is!

It’s a legal document that the company creates when it seeks to raise capital through debentures. By the deed, the company appoints a debenture trustee and demarcates his responsibilities. The debenture trustee ensures that the terms of debenture issuance are followed so the rights of debenture holders are protected.

Cast of a debenture trust deed

Issuing company: insightful entrepreneurs 

As per Section 71(4) of the Companies Act 2013, it is mandatory to create a debenture redemption reserve account whenever debentures are issued by a company.

But what exactly do we mean by a debenture redemption reserve account? 

A company creates this account from its profits to make timely payment of dividends. So, this amount is specially earmarked for the redemption of the debentures. That means when the maturity period comes, the company can use this amount to redeem the debentures.

Debenture holders: insightful investors 

Debenture holders are the people who have paid a certain amount to the issuing company in exchange for the debenture. In other words, anyone who buys a debenture from a company is a debenture holder.

For example, if tomorrow Reliance comes out with debentures and I invest in them or buy them, I would be a debenture holder. Here is a list of debentures you can buy in India! 

Debenture trustees: the referee 

The debenture trustee is an independent party appointed by the issuer company to protect the interests of the debenture holders. As we understood above, a debenture only provides fixed principal payments with periodic interest but no ownership rights. 

Section 2 (bb) of the Securities and Exchange Board of India (debenture trustees) regulation, 1993, defines a debenture trustee as a “trustee appointed in respect of any issue of debentures of a body corporate”.

Section 71(5) of the Companies Act 2013 states that whenever a company issues a prospectus or makes an offer or an invitation to the public or its members, amounting to more than 500 people to offer subscriptions of its debentures. It is a mandatory condition that before such an offer, the company must appoint a debenture trustee.

The investors must have a person who acts independently and without bias to ensure their interests are protected.

He ensures that the company complies with the terms and conditions of the debenture.

The debenture trustees are regulated or governed by the Securities and Exchange Board of India (SEBI). The SEBI (Debenture Trustees) Regulations, 1993 provide for eligibility criteria for the registration of debenture trustees, their monitoring and review and the code of conduct, etc.

Powers of the debenture trustee to delegate 

A debenture trustee may be a company, a body corporate or a firm. Therefore, the duties or responsibilities of the debenture trustee would have to be delegated to a particular person associated with the debenture trustee company. Consequently, the right to delegate the said responsibilities to the authorised officer must also be mentioned in the debenture trust deed. 

Powers of the debenture trustee to employ agents

Similarly, if the debenture trustee is a firm or a body corporate, it can employ agents to carry out the responsibilities of the trust.

A Debenture trustee can contract with the issuer company

Another important detail that must be clarified in the debenture trust deed is whether the trustee would be allowed to transact or contract with the company, independent of the debenture trust deed. 

A..B..C.. of a debenture trust deed

Essential covenants in the debenture trust deed 

There are primarily 5 covenants that are included in a debenture trust deed. These covenants can be understood as promises made by the company to the debenture holders. The debenture trustee has to ensure that the company fulfils its promises. With this, let’s discuss five specific covenants that must form a part of a debenture trust deed.

These are as follows:

• Appointment of debenture trustee
• Affirmative covenants 
• Negative covenants 
• Financial covenants 
• Indemnity provision 

Appointing the debenture trustee

One of the primary roles of creating a debenture trust deed is to appoint a debenture trustee to protect the interests of the debenture holders. Now, we will be answering some important questions about debenture trustees. Let’s begin with the first one! When is it mandatory to appoint a debenture trustee? Read on to know it!

Mandatory requirement to appoint a debenture trustee

As per the SEBI (Issue and Listing of Non-Convertible Securities) Regulation 2021, it is compulsory to appoint a debenture trustee by the issuer company in case it issues non-convertible debentures to the public.

Further, according to the same regulations, the issuing company must appoint a debenture trustee if it’s proposing to list private non-convertible securities.

As per SEBI (Issue of Capital and Disclosure Requirements) Regulation 2018, it is mandatory to appoint a debenture trustee to every publicly listed company that issues convertible debentures.

Next, we will be answering the question: Who can be appointed as a debenture trustee? 

Eligibility criteria to be appointed as a debenture trustee

Now that we know in what cases the issuer company needs to appoint a debenture trustee, the next question arises: who can be appointed a debenture trustee?

We can find the answer in the SEBI (Debenture Trustee) Regulations, 1993! 

According to the regulation, four entities can be appointed as a trustee, these are as follows:

1. A scheduled bank carrying on commercial activity
2. A public financial institution as per Section 2(72) of the Companies Act 2013
3. An insurance company
4. A body corporate as per Section 2(11) of the Companies Act 2013.

But how does SEBI decide whether a corporation or a body corporate can be granted the status of a debenture trustee? What parameters does it consider? Let’s find out next!

SEBI parameters for appointing a debenture trustee

Since the position of a debenture trustee is that of a referee, the following conditions must be satisfied for a body corporate to be appointed a debenture trustee:

1. The applicant must have the necessary infrastructure, like an office, space, equipment, and manpower, to conduct its responsibilities and effectively discharge its duties.
2. The applicant must have prior experience of being a debenture trustee. Alternatively, it must employ at least two individuals with experience in matters relevant to a debenture trust deed.
3. The director or a principal officer of the applicant must not at any time be convicted of an offence involving moral turpitude or found guilty of an economic offence.
4. The applicant must have a legal professional in their employment.
5. The applicant must have a net worth of at least two crore rupees.

Only after these conditions are fulfilled does the SEBI grant the debenture trustee the certificate of registration.

What if the issuer company appoints some entity related to it as a debenture trustee? Let’s find out!

Restrictions on appointment as debenture trustee

Section 13a SEBI (Debenture Trustee) Regulations, 1993 provide us with an answer to this question!

It provides us with some instances where a person or body corporate cannot be appointed as the debenture trustee:

• When it is an associate of the issuer body corporate
• When it holds shares in the issuer company
• When it is a promoter, director or one who holds a key position or is an employee of the company or its subsidiary company
• When it is indebted to the company or its subsidiary
• When it is the relative of any promoter or any person in the employment of the company as a director

Now, if all the above-mentioned questions are answered in the affirmative in favour of a debenture trustee, we will finally move on to the appointment process.

How is the debenture trustee appointed? Let’s find out!

Process of appointing a debenture trustee

A debenture trustee can be appointed in the following words: 

“The Issuer has appointed the Debenture Trustee as trustee for the holders of Debentures under the Debenture Trustee Agreement. The Issuer hereby settles in trust with the Debenture Trustee a sum of Rs. _________ (Rupees_______only). 

The Debenture Trustee hereby confirms receipt of and accepts the above amount of _________in trust hereby declared and hereby agrees to act in a fiduciary capacity as trustee for the sole and exclusive benefit of the Debenture Holders.”

Affirmative covenants: The promise to do

We can understand affirmative covenants to be promises. The company takes these promises upon itself to deliver. These are the duties that the company will fulfil. If these are breached, the default clause may be brought into effect. Let’s see what clauses can be included under the affirmative covenants:

• Covenant to pay the principal
• Covenant to pay the interest 
• Covenant to use the funds raised towards the specific purpose for which they are raised
• Covenant to comply with all the laws applicable to the issuer. This would include the Companies Act, the SEBI listing regulations, etcetera.
• Covenant to keep proper books of accounts as required by the law. This would include making true entries regarding all its transactions. 

Information covenants: the promise to tell the truth

An information covenant is a type of disclosure that the company makes about its work to the debenture trustee. The debenture trustee is appointed to protect the interests of the debenture holders. Therefore, he needs to know the workings of the issuer company.

In the debenture trust deed, you can add a clause about the periodic submission of a report to the debenture trustee about:

• List of names and addresses of debenture holders 
• Details of coupons due but unpaid, and reasons for such non-payment 
• Sufficiency of assets of the issuer available as security to discharge claims of debenture holders

Negative covenants: the promise not to do

These can be understood as ‘I will not do these’. The issuer company promises not to do’ certain things that would negatively affect the interest of the debenture holders.

For instance, in a secured debenture, the issuer company would undertake to NOT create any new encumbrance upon the property given as a security. This might negatively impact the interest of the debenture holders in case of a default by the issuer company.

Similarly, the issuer company may undertake NOT to enter into any agreement or commitment that might conflict with the provisions of the debenture trust deed.

These were some negative covenants that the issuer or company may enter into. Let’s discuss financial covenants next.

Financial covenants

Money matters are the most important part of the deal! So let’s see what financial covenants we can include in our debenture trust deed:

• Debt service coverage ratio: This is a tool that measures the present cash flow of the company and its present debt obligations. This ratio must be maintained at all times by the issuer company till the final settlement date.
• All payments required under the debentures issued shall be payable on the due date.  

Indemnity provision

Do you know what indemnity means?

Don’t worry if you don’t, it’s a contractual agreement between two parties. According to this contract, one party agrees to pay for any potential losses the other party might suffer. 

So, in the debenture trust deed, who is providing indemnity to whom? 

The issuer company agrees to indemnify the debenture trustee and the debenture holders against any losses, expenses, etc. The indemnity is for the losses due to the debenture trustee entering the debenture trust deed and debenture holders subscribing to the debentures. 

The issuer company also agrees to indemnify the debenture trustee and debenture holder against any losses faced due to the following acts:

• The issuer company fails to comply with the provisions of the applicable laws.
• The issuer company fails to protect the interest of the debenture trustee concerning the security.
• The issuer company is committing a default as per the terms of the deed.

These are some illustrations only, the parties can choose to draft the terms of their deed as per their agreement. 

The next type of clauses essential in a debenture trust deed are the security-related clauses. Let’s explore how we can draft these clauses.

Security and collateral clauses

If you have read the article above, you will be aware of the two types of debentures: secured and unsecured. 

Which of the two debentures do you think would need a security or a collateral clause?

Correct! It would be a secure debenture. 

But now the question is, what would a security clause look like?

Framework of a security clause

• Firstly, the issuer company will state that it is the legal owner of the property provided as security. They must also state that the property is free and clear of all encumbrances. 
• Secondly, the company would also have to state that it is entitled to charge (enter into an obligation) the property as per the debenture trust deed.
• Thirdly, the company would also undertake that creating a new charge over the property as per the terms of the trust deed would not violate any law or any prior agreement.
• Lastly, the company would also state that after the debenture trust deed is executed, the property would be charged in favour of the debenture trustee. The trustee acts in the interest of and on behalf of the debenture holders.

One thing reflected from these clauses is that the aim is to protect the interest of the debenture holders in case of default. So if the company fails to discharge its primary obligations of paying the interest and the principal, the security can be used to pay back the debenture holders.

The next question to answer is about the realisation of security!

Process of realisation of security

In the occurrence of an event of default, the debenture trustee shall hold the monies received by it in respect of the security property. He can sell the property and reimburse himself for all the costs from its proceeds.

Now, he can utilise the rest of the amount in the following order:

1. FIRSTLY, in or towards payment to the debenture holders of all arrears of interest, including default interest remaining unpaid on the debentures held by them.
2. SECONDLY, in or towards payment to the debenture holder(s) of the principal amounts owing on the debentures held by them.
3. THIRDLY, in or towards payment of the surplus (if any) of such monies to the issuer in terms of the transaction documents of the debenture.

So, for instance security property was sold for 100000 (one lakh), he will disburse the money in the following order:

1. Pay himself for all costs incurred in the sale of property, etc: 1000
2. Pay the arrears of interest to debenture holders: 9000
3. Pay the principal amount to the debenture holders: 80000
4. Pay the remaining back to the issuer company: 10000

Redemption 

A debenture trust deed must specify a final redemption date along with contingencies such as default or early redemption.  Now we will be looking at the different types of redemption:

Final redemption	Happens on a predetermined date of maturity.
Redemption upon the occurrence of a default	when a default is committed by the company as per the debenture trust deed.
Mandatory redemption	This happens when the issuer company has to redeem the debentures earlier than the maturity date.
Voluntary redemption	This happens when the issuer company pays back the principal amount of debentures before the maturity date.

Provisions in case of default 

Consider this, you purchased a debenture and for 4 years you were regularly receiving your interest payments. But one day, you are informed that the issuer company is attempting to charge the security property for some other liability or is attempting to sell it. What will happen to your payment? In this segment, we will find the answer to this! 

A debenture trust deed must provide for two provisions relating to default:

• What would constitute a default?
• What can the debenture trustee do in case of default?

Events of default 

In an ideal scenario, the issuer company would pay the interest due and, on maturity, pay the principal amount. However, we do not live in a perfect world, and there is are possibility that the issuer company might default. 

But what exactly is considered a default?

This can be decided by the parties under the debenture trust deed. Some events which may be considered to be a default are as follows:

• When payment due in respect of the debentures has not been paid on the due date.
• The company breaches any representation provided under the terms of the document or fails to fulfil any obligation undertaken.
• The credit rating assigned to the debenture by the credit rating agency falls below the ‘AA’ rating.
• If the information given by the issuer is misleading or incorrect.
• If the issuer voluntarily creates any encumbrance on the security.
• If, in the opinion of the debenture trustee, the security is in jeopardy.

These are only some illustrations of what events may be considered as a default. The parties may choose to incorporate specific events under their debenture trust deed.

On the occurrence of a default 

What if any of the above-mentioned events happen? 

What is the next course of action for the debenture trustee? 

Let’s find out!

The debenture trustee, in case of a default, can do the following:

• Initiate the redemption of the debentures. Consequently, all amounts concerning the debenture would become immediately due and payable 
• He can sell, convert into money, or otherwise deal with or dispose of the security property. 
• He can direct the escrow bank not to permit any withdrawal by the issuer from any of the payment accounts
• Section 71(9) of the Companies Act 2013 deals with the situation where the Debenture trustee has a belief that the assets of the company are or would become insufficient to discharge the liability related to debentures when they become due. He has a right to file a petition before the tribunal for an order restricting the incurring of any further liabilities by the company.

These are some illustrative examples of what a debenture trustee can do in case of a default. Since his primary rule was to protect the interest of the debenture holders, he would act in a way where the capital of the debenture holders was paid back.

Role and responsibilities of the trustee 

The debenture trust deed is made to appoint a trustee and to lay down his responsibilities. We need to know those responsibilities. These are mentioned in Chapter 3 of the SEBI (Debenture Trustees) Regulation 1993.

The following are the duties that a debenture trustee must perform:

1. He has to call for periodical reports from the body corporate/ company issuing debentures.
2. He can take possession of the trust property as per the terms of the trust deed.
3. He can enforce security in the interest of the debenture holders.
4. He has to continually ensure that the property charged to the debenture is adequate and available at all times to discharge the interest and principal amount liability. 
5. As per Section 71(9) of the Companies Act, 2013, the trustee concludes that such charged property is inadequate or the assets of the company are insufficient to discharge the principal amount when it becomes due. He can file a petition before the National Company Law Tribunal (NCLT).
6. If on the date of maturity of the debenture the company fails to redeem them or doesn’t pay interest when due, the trustee can apply to the National Company Law Tribunal to order the performance of these duties.
7. He has to ensure that the company is compliant with the Companies Act 2013, the listing agreement of the stock exchange or the trust deed.
8. He has to take adequate measures to protect the interests of the debenture holders in case he gains knowledge about any breach of law or trust deed.
9. He has to ascertain that the debentures are either converted or redeemed according to the provisions and conditions offered to the debenture holders.
10. He must inform the board about any breach of the trust deed or provision of law.
11. He must appoint a nominee director on the board of the body corporate when required.

Protecting the debenture holders

Imagine that you purchased a debenture from company X and now you have stopped receiving the periodic interest on it, or the time for maturity has arrived, but you still haven’t paid your principal amount. To deal with such situations, we need to understand what provisions are there to protect the debenture holders. Moving forward, we will understand these.

When the issuer fails to pay you money back

Usually, the debentures are secured by creating a charge on some property owned by the issuing company. So, in case of liquidation or a default by the company, the assets can be disposed of to repay the debt holders.

A Layer of security for the debenture holder

The debenture trust deed contains all the terms of payment of the principal amount as well as the interest. The deed mentions the amount and the time of payment. This grants surety to the debenture holders that they will get their money back.

Promises made by the issuer company

The promises that the company makes are known as covenants. These can either be affirmative or negative. The debenture trust deed contains all the covenants, for example, the timely payment of interest, restriction on borrowing, etc.

Remedies if a default occurs on the part of the issuer company

The debenture trust deed mentions not only the events that would be considered as default. It also provides remedies in case such a default occurs. In case the company defaults, the debenture trustee has the right to sale make a seal of the security and repay the debenture holders.

Further, as per Section 71(12) of the Companies Act 2013, a contract that the debenture holder has with the company to take up and pay for the debentures can be enforced by a decree of specific performance.

Benefits a debenture holder would get in case of liquidation

If the company goes into liquidation or is wound up, the debenture holders get a priority in repayment over other unsecured creditors. This priority is for the payment of interest as well as the principal.

Unilaterally changing the terms of the debenture trust deed

A debenture trust deed usually contains a clause dealing with changes. It states that any change in the deed would only be made after consent is obtained by the debenture trustee and the majority debenture holders. This would protect the debenture holders from the issuer company making any unilateral changes that might be against their interest.

Requirements of regulatory compliance and reporting

Disclosure requirements for the issuer company

A debenture trust deed is regulated by the Companies Act and the SEBI regulations, therefore, it is very important that an undertaking is made in the debenture trust deed about all the regulatory compliances. 

For instance, one of the disclosures could be:

That neither the company nor any of their current or future directors /promoters /guarantors /associates, concerns /partners /coparceners (as the case may be) is or shall be:

1. In the Export Credit Guarantee Corporation’s (ECGC’s) specified approval list;
2. Convicted under the provisions of the Conservation of Foreign Exchange and Prevention of  Smuggling Activities Act, 1974;
3. On the RBI’s defaulters/ caution list, or
4. On any bank or financial institution’s defaulter list.

As you can see, the above-mentioned disclosure is about the creditworthiness and the ethical nature of the issuer company. 

Ongoing reporting obligations of the issuer company

The issuer company must permit the debenture trustee to enter into, view and inspect the state and conditions of the security. Further, all the records relating to the security must also be made available to the debenture trustee.

The issuer company has to furnish a report to the debenture trustee, the rating agencies and the Bombay Stock Exchange (BSE) on a half-yearly basis about the following particulars: 

• A Certificate from the auditor about the utilisation of the proceeds of the issue for the execution of the projects
• Report about the status of the project, along with the reasons for the delay, if any
• A Certificate issued by an independent chartered accountant certifies that the issue is servicing the debenture family and on relevant due dates

You must remember that these are only illustrative terms, and the parties can decide to vary them per the needs of that trust deed. As you must have understood by now, the primary objective of all of these terms is to protect the interest of the debenture holders.

Consequences of non-compliance with regulatory requirements

Any remedy would be an empty promise unless backed by legal sanctions. So we will now briefly understand the consequences of non-compliance with the regulatory requirements.

1. Noncompliance may be treated as a default as per the debenture trust deed.
2. It may lead to a levy of penalties by the SEBI or the RBI.
3. Noncompliance with disclosure requirements may, in extreme cases, lead to the suspension or delisting of the issuer company from the stock exchange.
4. If the company fails to fulfil the regulatory or disclosure requirements, it would lead to a loss of credibility and investor confidence in the company.

Understanding debenture trust deeds through a case study 

Now comes the most exciting part of the article!

Are you ready to formulate a debenture trust deed for your company?

Let’s begin

First, think of a name for your company. I would like to name mine Chelsea. 

Now, imagine what business your company carries out. Mine carries out the business of manufacturing coffee mugs.

Now my company seeks to expand its manufacturing facilities and needs capital. One option could be to take a bank loan, but another could be issuing debentures. 

I choose to issue debentures. 

To protect the interests of the debenture holders, I decide to enter into a debenture trust deed with a debenture trustee.

The debenture trustee must monitor and ensure that my company complies with the terms of the debenture issue and that the rights of debenture holders are protected.

Now we need to provide some fundamental details:

• Amount to be raised by issuing debentures: 10 Crores
• Interest rate: 8% per annum, payable annually 
• Maturity date: 7 years from the date of issue 
• Security: The debentures are secured by a charge on the factory of the company 

With this, we will formulate some hypothetical debenture trust deed clauses:

1. The company must pay the interest on time to the debenture holders.
2. The company must provide the trustee with regular financial statements.

If the company fails to pay the interest or principal, the trustee will have the right to seize secured assets and make a sale to ensure payment to debenture holders.

The trustee shall ensure that the company does not breach any financial or operational covenants as per the trust deed. 

(This is only an example to show you how the terms we discussed above are used in the debenture trust deed.)

After the execution of the debenture trust deed, imagine that after 2 years the company defaults.

What will happen if my company defaults?

My company faces financial troubles and defaults in giving annual interest payments. The company will inform the trustee about the problem and seek an extension. In case the trustee refuses the extension, he will take the following steps:

• The trustee calls for an emergency meeting with the management of my company to understand the problem.
• If he concludes that the covenant as per the debenture trust deed has been violated.
• He may decide to invoke the default clause under the debenture trust deed.

What will the trustee do now to protect the interests of the debenture holders?

• He can either sell the security given by the issuer company, or 
• He can apply to section 71(9) of the Companies Act to the National Company Law Tribunal.

Draft of debenture trust deed

THIS TRUST DEED is made this………………… day of………………… 2007, between …… incorporated under the Companies Act, 1956 with its registered office at……… (hereinafter called “the Company”) of the One Part, and Mr………………… and Mr………… (hereinafter called “the Trustees”) of the Other Part. 

WHEREAS by Sub-Clause………………… of Clause………………… of its Memorandum of Association, the company is authorised to borrow or raise and secure the payment of money by the issue of debentures charged upon any of the company’s property. 

AND WHEREAS the Directors of the company are duly empowered in that behalf by Article No. ………………… of the Articles of Association of the company have decided by a resolution passed in pursuance of Section 292 of the Companies Act, 1956 by the Board of directors in the meeting of the Board held on………………… to raise a sum of Rs…………… by issue of………………… First Mortgage Debentures of Rs………… each, bearing interest at………………… per cent per annum, framed by the forms outlined in the First Schedule hereto and to secure the same by mortgaging with the trustees the properties described in the Second Schedule hereto. AND WHEREAS the trustees above-mentioned have consented to act as trustees for the debenture holders. 

NOW THIS DEED WITNESSETH AND IT IS HEREBY MUTUALLY AGREED TO AND DECLARED BY AND BETWEEN THE PARTIES HERETO AS FOLLOWS: 

1. That in these presents unless there be something in the subject or context consistent therewith, the expression following shall have the meaning hereafter mentioned, that is to say: 

(This is where you define various terms used in the deed.)

Example:

(a) “Company” means………………… Ltd. 

(b) “Trustees” means Mr………………… or any other trustees hereof for the time being. 

(c) “Debentures” means the debenture of the company in the form set out in the First Schedule hereto for the time being outstanding and entitled to the benefit of these presents.

(d) “Debenture holders” means the holder for the time being of the debenture issued and entered in the register of debenture holders, mentioned on the conditions endorsed on the debentures on the holder of the debentures.

2. The company hereby covenants with the trustees that the company will on the………………… day of………………… or such earlier day as the principal moneys shall become payable under clause 7 hereof pay the debenture holders the amounts secured by their debentures respectively, and in the meantime will pay interest to the debenture holders on the day of………………… 20… in each year, the first payment of interest to be made on the day of………………… 20… 
3. In consideration of the debentures hereby authorised aggregating to Rs………………… the company, as the beneficial owner, hereby mortgages unto the trustees all the fixed plant and machinery and fixtures at present existing at the company’s factory and described in part A of the Second Schedule hereto. 

(This is the security clause.)

4. The principal moneys due to the debenture-holders under this Indenture shall become immediately payable and the security hereby constituted shall become enforceable within the meaning of these presents in each and any of the following events:

(Herein, you will mention all the acts that would be considered as default)

For Example:

(a) If the company makes a default in the payment of any interest which ought to be paid by these presents. 

(b) If the company, without the consent of debenture holders, ceases to carry on its business or gives notice of its intention to do so. 

5. As soon as the principal money shall become payable and the security enforceable under the last preceding clauses the trustees shall enter upon and take possession of the mortgaged premises and shall forthwith take steps to consult the debenture holders for the purpose of determining whether the business of the company may be allowed to be carried on or whether the mortgaged premises shall be realised by sale or otherwise. 

( This clause answers the question of what would happen in case of default)

6. The trustees shall apply the proceeds of such sale or other mode of realisation in the following manner, that is to say, that the trustees shall pay: 

(a) In the first place, all costs, charges and expenses incurred in or about such sale or the performance or execution of trust or otherwise about these presents or otherwise in respect of the security, including the remuneration of the trustees. 

(b) Secondly, the interest for the time being due and owing on the debentures. 

(c) Thirdly, the principal money is then due and owing to debenture-holders. 

(d) And lastly, the surplus, if any, to the company or its assignee.

( This clause deals with the realisation of security)

7. The company hereby covenants with the trustees:

(This is where all the affirmative covenants, negative covenants, financial covenants etc, would be placed)

8. The company hereby further covenants with the Trustees that the company shall duly perform and observe the obligations hereby imposed upon it by this deed.

Points to remember when you draft your first debenture trust deed

In this section, you will be introduced to some fundamental clauses that must form a part of your debenture trust deed!

Important legal considerations while drafting 

Ensure compliance with legal regulations

While drafting a debenture trust deed, you must ensure that the terms comply with all the applicable laws. For instance, in India, you must comply with the following laws:

• Section 71 of the Companies Act, 2013:

• Ensure appointment of debenture trustee.
• File a prospectus with the Registrar of Companies if debentures are offered to the public.
• Creation of Debenture Redemption Reserve (DRR).  
• SEBI Regulations: The SEBI (Debenture Trustees) Regulations, 1993: appointment of debenture trustee as per the provisions.

• Eligibility for appointment as debenture trustee.
• Lays down the responsibilities of a debenture trustee.
• Lays down the terms which must form a part of the debenture trust deed.
• SEBI (Issue of Capital and Disclosure Requirements) Regulation 2018

• Provides the eligibility criteria for the issuer company (minimum net worth, etc).
• Requirements and contents of the offer document, which have to be filed before the issue of debentures.
• Lays down the requirement of disclosure (quarterly financial statements, annual reports, etc).
• SEBI (Issue and Listing of Non-Convertible Securities) Regulation 2021

• Provides for regulation dealing with a listing of debentures on the stock exchange
• Lists eligibility criteria for issuer company (positive net worth, etc)

Regulatory body governing debenture trust deeds

The Securities and Exchange Board of India is the body that regulates debenture trust deeds in accordance with the SEBI regulations mentioned above. 

Debenture trustee: In the case of a debenture trustee, SEBI looks over their functions by:

• Laying down specific eligibility criteria to act as a debenture trustee. 
• The SEBI also has the authority to inspect the records of the debenture trustee to make sure that they’re complying with the regulations laid down by SEBI. 
• Further, in case the debenture trustee fails to fulfil their obligations, SEBI can take legal action against them, including revocation of their registration.

Issuer company: In the case of the issuer company, SEBI looks over their functions by:

• They are bound to adhere to the SEBI regulations before the issuance of debentures.
• Further, the debenture trust deed also has to be created as per the SEBI guidelines. 
• To safeguard the interest of the debenture holders, SEBI takes action against the issuers who are involved interests in fraudulent practices or misrepresentations in the debenture documents.

Clear stipulation about the responsibilities of the parties

The primary goal of a debenture trust deed is to safeguard the interests of debenture holders and to specify the various responsibilities of the trustee. Therefore, the duties of the trustee must be included. For example:

• Monitoring the compliance of the debenture trust deed by the issuer company.
• Acting bona fide to protect the debenture holders’ interests.
• Taking due diligence action in case of default by the issuer company.

Provisions about security and collateral 

As we read above, a debenture can either be secured or unsecured; that is, it might have a security backing the obligation of the issuer in the case of an unsecured debenture. Therefore, in such debenture trust deeds, there must be specific clauses which deal with the following details:

• The description of assets over which the securities are created. For instance, an immovable property may be charged against the debentures.
• The details of the kind of security created. For instance, a charge mortgage, pledge, or hypothecation has to be specified.
• The responsibility of the trustee to hold the security on behalf of the debenture holders must also be discussed.

Agreement on covenants

This is a legal document created by the company to appoint a debenture trustee to protect the rights of the debenture holders. Therefore, in such a deed, the issuer stipulates a series of covenants which can either be affirmative or negative as discussed above. 

Affirmative covenant would cover provisions like maintaining financial ratios, ensuring timely payment of principal and interest, etc. 

Whereas, a negative covenant would include provisions providing for restrictions on additional borrowing or asset disposal by the company.

Situations of default and remedies 

The primary purpose of executing a debenture trust deed is to appoint a debenture trustee to ensure that the interests of the debenture holders are protected. Therefore, the debenture trust deed must provide for the remedies in case of a default by the issuer company. 

The deed must provide clear situations that would be considered a default by the company. For example, the failure to pay interest or the principal amount or breach of covenant, etc. Secondly, it should also provide what remedies the trustee will have in case of such default, for example, the enforcement of security, etc.

Non-Negotiables: clauses you must include

Representations and warranties of the Issuer company

Through the issue of debentures, the company attempts to raise capital, and the debenture holders extend a loan on the belief that the company will repay it. 

So, what is very essential in this transaction? It’s transparency! 

Therefore, in a debenture trust deed disclosure clause by the company is very important about various things like:

• The company or corporate body has been duly established under the provisions of the Companies Act 2013. It must also state that it has the power to sue and be sued in its name and to own its assets. It must also further state that it has the power to carry on its business.
• The company must state that the debenture transaction is not in conflict with the law of the land. 
• Additionally, it must also not conflict with the constitutional documents of the company or any agreement or instrument that has been entered into by the issuer company.
• Any contract or transaction must be entered into with full disclosure. Therefore, any information the issuer provides to the debenture holders by the trust deed must be true and accurate.

Representations and warranties of the debenture trustee

The second party to the debenture trust deed is the debenture trustee. He is also bound to disclose any information required for a transparent and fair performance of his duty. 

Since the debenture trustee acts as a referee in a debenture trust deed, it’s important to ensure that he is eligible to be appointed as such. So, some disclosures and undertakings are also made a part of the debenture trust deed. Some examples of the same could be:

• In case the debenture trustee is a company, it can state “that it is a company duly incorporated and validly existing under the law applicable”. 
• Further, it can state “that the debenture trustee is duly qualified and authorised to enter the debenture trust deed”.
• A debenture trustee is registered as a debenture trustee with the SEBI under the SEBI (Debenture Trustee) Regulations, 1993.

Covenants and undertakings by the issuer 

The primary party making the debenture trust deed is the issuer company. Therefore, an important requirement is to include some undertakings by the issuer in respect of various facts like:

• The status of the issuer must be mentioned. This means that the issuer is a company or a body corporate duly established as per the provisions of the law applicable.
• For the issuer company to express that the obligations undertaken by the trustee are binding
• The next step would be to ensure that it has the power to enter into and deliver all the actions it has entered into as per the debenture documents.
• Another important undertaking would be the fact that all necessary authorisations have been taken out related to the issue of the debenture.
• Disclosure also needs to be made about any pending litigation, arbitration, or administrative proceedings in which the issuer company is a party

Governing law and jurisdiction 

Just like the parties are free to choose the place of arbitration in an arbitration proceeding, they can also choose the laws that would govern their debenture trust deed.

Further, the jurisdiction decided would also decide which court or tribunal would have the jurisdiction to settle the disputes arising from the debenture trust deed.

Interestingly, the parties can also choose to include an arbitration clause in the deed.

Provisions relating to notices 

Since there may be instances where communication has to be done, a clause relating to notices, demands, etc, must be established. The parties can choose to opt for written communication. These can be delivered by personal delivery, registered post or even e-mail. 

Tailor to the needs of the transaction: customised clauses for specific transactions

Just like we have our special recipes for our special dishes, an efficient debenture trust deed must be curated for specific transactions. When we draft a debenture trust deed, we can customise the terms depending upon factors like the nature of the transaction, the type of debentures, the security arrangements, etc.

Custom clauses for secured debentures

In case you are dealing with a debenture trust deed that is related to a secured debenture, some factors you must keep in mind are:

• Creation of security: You must aim to define and demarcate the secured assets. These can either be movable or immovable properties. Further, you must ensure that a ‘first ranking’ exclusive charge is created to pay the interest and principal amount.
• Maintenance of security: You must ensure that throughout the existence of the debenture, the security remains adequate to discharge the liabilities of the issuer company towards debenture holders. For this, the clause must stipulate a security coverage ratio, provision for security maintenance, etc.

Clauses requiring a cash flow waterfall mechanism

Waterfall mechanism? Sounds fancy, doesn’t it? 

It means that an escrow account would be created in which the funds for payment of debentures would be deposited. 

But the waterfall part is that the funds going into the account would come from a specific project mentioned. 

For example, Company ‘A’, which has issued debentures, is also running an airport business. The debenture trust deed might provide that 50% of the profits coming from the airport business would go towards the payment of the debentures. This would prioritise the cash flow or money available for debenture repayment.

Custom clauses providing for a put option

Do you remember we discussed ‘callable debentures’ above, where the issuer company can redeem the debenture before the maturity date? 

A put option is the opposite of that. It allows the debenture holder to demand early redemption by the issuer company. However, this can only be exercised if a certain contingency occurs. For instance:

• The issuer’s credit rating falls below a certain limit; or
• The control of the issuer company changes without prior approval of the debenture trustee.

Clauses providing for milestone-based monitoring

Another fancy phrase? Milestone-based monitoring. Just understand this as your father saying that if you get an amazing grade on your next test, I will get you a new phone!

In a debenture trust deed, the conditions laid down are about achieving certain project-related milestones. For instance, if the issuer company acquired a certain land in 2 months or if it completes the said project 50% within 3 years, etc. 

If the issuer company cannot achieve these milestones, it would grant the trustee the power to either request additional security or declare such an event a default. 

These are only illustrative clauses. The parties are free to tailor them according to their agreement. To look at some draft debenture trust deeds, you can click here. 

Relevant case laws on the debenture trust deed

Catalyst Trusteeship Limited vs. Riyasat Towers Pvt Ltd (2019)

In this case, an application under Section 7 of the Insolvency and Bankruptcy Code 2016 was filed by the applicant who was appointed as the debenture trustee by the respondent issuer company. 

The respondent company, to carry out its business operation and development of an infrastructure project, had issued secured, redeemable, non-convertible debentures. As per the terms of the debenture deed, the respondent was required to pay interest and other dues as per the timelines decided. However, he committed default in the performance of the following obligations:

1. He failed to pay the interest as per the terms of the debenture trust deed.
2. He failed to achieve the project milestones as per the deed of trust deed.

As a consequence of these defaults, the applicant-debenture trustee issued a default notice and called for redemption of the debentures. This means that the amount of the debentures, along with interest and default interest, became immediately due and payable. These claims of default were refuted by the respondent company.

However, the National Company Law Tribunal (NCLT) held that the existence of a default in the performance of the terms of the debenture trust deed is proved. The NCLT initiated the Corporate Insolvency Resolution Process (CIRP) on the respondent firm with immediate effect. 

You must be wondering, what exactly is the Corporate Insolvency Resolution Process?

CIRP is a legal process through which it is determined whether the person in default is capable of repayment or not. In case the person is not capable of repaying the debt, the company is restructured or liquidated.

Debenture trust deeds in different jurisdictions

The basic framework remains the same across jurisdictions, as a debenture trust deed, in essence, seeks to protect the debenture holder’s interest. The major difference occurs in the regulatory environment and compliance with local laws.

Let’s explore the specific requirements and structures of debenture trust deeds across a few jurisdictions. This would help us understand the differences and draft efficient deeds in case of international transactions.

United Kingdom

Governing law in the UK about Debenture trust deeds

The Companies Act 2006, along with the general principles of Contract law, apply to debenture trust deeds in the United Kingdom.

Requirement of debenture trust deeds in the UK

No, there is no mandatory requirement for a debenture trust deed unless the terms of debenture issuance state so.

Process of appointing debenture trustees in the UK

The trustee appointed is often a financial or legal institution. The trustee acts as per the terms of the debenture trust deed.

Important terms under the debenture trust deeds in the UK

Terms like interest rates payable, repayment schedules, events of default and powers of the trustee are part of the debenture trust deed. 

By these insights, we can conclude that while the fundamental basics are similar, the Indian system is more regulated, while the UK system offers more flexibility.

United States of America

Governing law in the US about debenture trust deeds

The Securities Act of 1933 and the Trust Indenture Act of 1939 are the governing laws in the United States.

Requirement of debenture trust deeds in the USA

As per the Trust Indenture Act 1939, a ‘trust indenture’ similar to a debenture trust deed is executed in case of debt securities offered.

Regulatory mechanism for debentures in the USA

Yes. Like the SEBI in India, the US has the Securities and Exchange Commission (SEC).

Role of the debenture trustee in the US

In the US, the debenture trustee has a supervisory role and does not participate in operational compliance. He only becomes active in the case of a default or breach of covenants.

Singapore 

Governing law about debenture trust deeds in Singapore

The governing law in Singapore is the Securities and Futures Act 2001 and the Trustees Act 1967.

Regulatory mechanism for debentures in Singapore

Yes, the monetary authority of Singapore is the regulating authority in the case of debentures. However, it provides more flexibility and autonomy to the parties in terms of the formation of the debenture trust deed. The disclosure and compliance requirements are less stringent than in India.

Role of the debenture trustee in Singapore

The Debenture trustee has a supervisory role. Their primary role is to ensure compliance with the covenant of the debenture trustee. However, they do not get involved in the operational day-to-day work of the issuer company.

Comparative analysis of different jurisdictions

Let’s have a glance at the comparison among jurisdictions via a table:

Countries	India	USA	UK	Singapore
Governing law	The Companies Act, 2013 and SEBI regulations	The Securities Act of 1933 and the Trust Indenture Act of 1939	The Companies Act 2006	The Securities and Futures Act 2001 and the Trustees Act 1967
Regulatory mechanism	Yes, the SEBI	Yes, the Securities and Exchange Commission (SEC)	Yes, the Financial Conduct Authority	Yes, the Monetary Authority of Singapore
Role of a debenture trustee	Supervisory role	Supervisory role	Supervisory role	Supervisory role

Conclusion

The article primarily dealt with the debenture trust deeds. However, some more fundamental questions about what a debenture is, why they are issued, how they are different from equity stocks, and more are also discussed.

We also discussed the cast of the debenture trust deed. First was the entrepreneur with huge dreams seeking funding. Second was the insightful investors looking for investment opportunities, and third was the referee, the debenture trustee.

We also dealt with the foundational clauses that must form a part of the debenture trust deed, like the covenants, the disclosures and the security clauses. Next, we explored new concepts like ‘the waterfall clause’ and the ‘milestone clause’.

Finally, after learning the theoretical part, the article also included a fun section where you could decide upon the terms of your debenture trust deed. This was intended to give you confidence that you can draft one effectively after reading the article! I hope you learned something from my article!

Frequently Asked Questions (FAQS) 

What is the primary purpose of a debenture trust deed?

The primary purpose of a debenture trust deed is to lay down the terms of the debenture, appoint the debenture trustee, and protect the interest of the debenture holders.

Who can act as a trustee in a debenture trust deed?

There are no strict rules about who can act as a debenture trustee. However, usually, a financial institution or a trust company with the necessary expertise and authorisation by the law acts as a trustee.

However, in the case of secured and listed debentures, a SEBI-registered debenture trustee must be appointed.

How does a debenture trust deed protect the investors?

The primary purpose of a debenture trust deed is to protect the interest of the debenture holders. Therefore, it includes all the terms and covenants the issuer company must follow. Further, in case of default, remedies are also provided in the debenture trust deed. 

Can the terms of a debenture trust deed be modified post-issuance?

Yes, the terms of the debenture trust deed can be modified post-issuance. However, it cannot be done unilaterally. Changes require the consent of all the parties involved and a significant majority of the debenture holders.

What happens if the issuer company defaults?

A debenture trust deed also provides remedies in case the company defaults. The trustee can enforce the security and pay back the money of the holders in case of a default.

Are debenture trust deeds mandatory for debenture issuers?

The answer to this question depends on the following:

• The jurisdiction in which you are transacting
• The nature of the debentures
• The status of the issuer company
• The law applicable

Does a debenture trust deed need to be registered?

Yes, a debenture trust deed should be registered with the regional sub-registrar as per the Indian Registration Act, 1908. After the debenture trust deed is executed and signed by both the issuer company and the debenture trustee, it must be stamped as per the Stamp Act, 1899. Finally, it’s submitted for registration with the Registrar of Assurances.

Is stamp duty payable on the debenture trust deed?

Yes, stamp duty is payable on the debenture trust deed as per the Indian Stamp Act, 1899. The stamp duty varies from state to state. The stamp duty is paid by the issuing company.

References

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