Chapter 20: SEBI (Debenture Trustees) Regulations, 1993

Debenture Trustees (DTs) protect the legal and financial interests of debenture holders by monitoring corporate debt covenants, verifying asset cover, and enforcing mortgage charges upon default.

Eligibility Criteria (Regulation 3)

A Certificate of Registration to act as a Debenture Trustee can be granted only to:

1. A scheduled commercial bank;
2. A public financial institution;
3. An insurance company;
4. A body corporate possessing professional infrastructure.

Capital Adequacy Mandate

Every Debenture Trustee must continuously maintain a minimum net worth of ₹10 Crores.

Strict Prohibition on Associates (Regulation 13)

A Debenture Trustee cannot act as a trustee for any issue of debentures by its associate (an entity where the trustee holds $\ge$ 15% voting shares or shares common directors), or if the trustee is an institutional lender to the issuer company, ensuring complete fiduciary independence.

Corporate debt issuances require formal trust documentation and security mortgage creation within statutory timelines.

Execution of Debenture Trust Deed (DTD)

• Under the Companies Act, 2013 and SEBI regulations, the issuer company must execute a formal Debenture Trust Deed (DTD) with the Debenture Trustee within three (3) months from the closure of the issue.
• The DTD must incorporate mandatory clauses set forth in Schedule IV, detailing:
  1. Complete legal description of mortgaged properties;
  2. Covenants on timely interest and principal payments;
  3. Events of Default (EoD) triggers;
  4. Asset cover maintenance ratios.

Security Creation Mandate (90-Day Rule)

• Where debentures are secured, the issuer must create a valid legal charge/mortgage over specified assets within ninety (90) days from the issue closure date.
• If the issuer fails to execute the DTD or create security within ninety days, it must pay penal interest of at least 2% per annum to debenture holders until compliance is achieved.

Debenture trustees must continuously track the financial health of the issuer and the adequacy of mortgaged security.

Asset Cover / Security Cover Monitoring

• The Debenture Trustee must verify that the issuer maintains the mandated asset cover (typically 1.25x or higher) at all times.
• Must obtain quarterly compliance certificates certified by an independent Chartered Accountant.

DLT-Based Security and Covenant Monitoring System

SEBI introduced a decentralized, tamper-proof Distributed Ledger Technology (DLT) platform for tracking debt covenants:

• Issuers, Debenture Trustees, Credit Rating Agencies, and Depositories record asset charge creations, asset details, and covenant compliance directly onto the DLT network.
• Prevents issuers from creating fraudulent, multiple charges over the same underlying physical asset.

Default Management & Enforcement of Security

In the event of an interest or principal default:

1. The DT must immediately issue a notice of default to the issuer company.
2. Must convene a meeting of debenture holders within thirty (30) days of default.
3. Upon receiving consent from debenture holders (representing at least 75% by value and 60% by number), the DT initiates recovery proceedings:
   • Enforcing mortgage charges and appointing a receiver;
   • Approaching the Debts Recovery Tribunal (DRT) or filing for corporate insolvency resolution under the Insolvency and Bankruptcy Code, 2016 (IBC).

Debenture Trustees bear statutory custodial and recordkeeping responsibilities under Regulation 14 and 15.

Mandatory Records to be Maintained

Every Debenture Trustee must maintain designated books of accounts, registers, and records:

1. Copies of all executed Debenture Trust Deeds and security mortgage agreements;
2. Comprehensive register of debenture holders for each corporate issue;
3. Records of all asset charges registered with the Registrar of Companies (ROC) and Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI);
4. Copies of quarterly compliance certificates, audited financial statements, and valuation reports submitted by issuers;
5. Detailed logs of all meetings of debenture holders convened and resolutions passed.

• Record Retention: All books, records, and trust deeds must be preserved for a minimum period of five (5) years after the redemption of the debentures.

SEBI actively supervises debenture trustees to ensure timely enforcement of debt covenants.

Regulatory Inspection & Scope

SEBI conducts periodic or theme-based inspections of Debenture Trustees to evaluate:

• Whether the DT independently verified the validity and value of mortgaged assets before executing the trust deed;
• Turn-around times for taking action upon debt service defaults;
• Adherence to DLT platform covenant recording mandates.

Code of Conduct (Schedule III)

• Maintain high standards of integrity, dignity, and fairness;
• Never act as a rubber-stamp for issuer corporate management;
• Ensure independent legal and financial verification of asset charge filings;
• In the event of default, act expeditiously and strictly in accordance with debenture holders' collective instructions.