The Hindu Business Line : SEBI tightens trustee norms to protect debenture holders

FACED with increasing instances of debenture payment defaults, the Securities and Exchange Board of India (SEBI) has tightened the noose around debenture trustees in a bid to protect the interests of debenture holders.

Besides prescribing capital adequacy norms for debenture trustees, the capital market regulator has amended its regulations on `debenture trustees' to comprehensively revise the contents of the trust deed that is to be executed between a body corporate and debenture trustee.

SEBI sources said that a debenture trustee would now be required to "ensure on a continuing basis that the property charged to the debentures is available and adequate at all times to discharge the interest and principal amount payable in respect of the debentures and that such property is free from any other encumbrances save and except those which are specifically agreed to by the debenture trustee".

Hitherto, a debenture trustee, as part of the duties, was only required to "exercise due-diligence to ascertain whether or not the assets of the body corporate which are available by way of security or otherwise are sufficient or likely to be or become sufficient to discharge the claims of debenture holders as and when they become due".

SEBI has now stipulated a net worth of at least Rs 1 crore to become eligible for obtaining a certificate of registration as a debenture trustee. All existing debenture trustees holding certificate of registration have been given a two-year timeframe to fulfil the new net worth requirement.

A debenture trustee would also be required to maintain the new net worth requirement on a continuous basis and inform the SEBI Board in respect of any shortfall in net worth. In case of a shortfall, the debenture trustee would not be entitled to undertake new assignments until it restores the net worth to the "level of specified requirement within the time specified by the SEBI Board".

SEBI has also stipulated that a debenture trustee cannot relinquish its assignments as debenture trustee in respect of a debenture issue of any body corporate unless another debenture trustee is appointed in its place by the body corporate.

Further, SEBI has now made it optional for a debenture trustee to inspect books of accounts, records, registers of the body corporate and the trust property to the extent necessary for discharging its obligations. Hitherto, the duties of a debenture trustee included inspection of books of accounts, records, registers of the body corporate and the trust property to the extent necessary for discharging its obligations.

A debenture trustee cannot now act as a trustee for any issue of debentures if "it has lent and the loan is not yet fully repaid or is proposing to lend money to the body corporate". This requirement is however not applicable for debentures issued prior to commencement of Companies (Amendment) Act, 2000 where recovery proceedings in respect of assets charged against security has been initiated or the body corporate has been referred to the Board for Industrial and Financial Reconstruction under the Sick Industrial Companies (Special Provisions) Act, 1985.

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