The Securities and Exchange Board of India (SEBI) on July 13, 2017 issued the SEBI (Debenture Trustees) (Amendment) Regulations, 2017 (Amendment Regulations) in order to amend the SEBI (Debenture Trustees) Regulations, 1993 (Principal Regulations) and make the reference to the corresponding provisions of the Companies Act, 2013 (Act, 2013) instead of the erstwhile reference of Companies Act, 1956 (Act, 1956).
SEBI at its board meeting held on April 26, 2017 approved the amendments to the Principal Regulations after considering the public comments to the proposed amendments which were placed through a Consultative Paper. The amendments were aimed to achieve following objectives:
- To streamline the existing provisions in the DT Regulations with the provisions as mentioned in the Companies Act 2013, Companies (Share Capital and Debentures) Rules, 2014 and on account of amendment to the other SEBI Regulations.
- To fortify the existing provisions in the DT Regulations to enable the debenture trustees to perform the task of securing the interest of the investors.
This article is an attempt to analyze the significant portion of the amendments.
References to terms defined under Act, 2013
The Amendment Regulations amends the definition of the following terms in Regulation 2 of the Principal Regulations in order to change the reference to the provisions of the Act, 2013 instead of the erstwhile Act, 1956:
|Regulation||Term defined||Substituted definition|
|2(aa)||associate||“associate” shall mean any entity which is an associate under sub-section (6) of section 2 of the Companies Act, 2013 or under the applicable accounting standards and shall include a person whose director, is also a director, of the debenture trustee or the body corporate, as the case may be.
|2(ab)||body corporate||“body corporate” shall have the meaning assigned to it in or under sub-section (11) of section 2 of the Companies Act, 2013 and for the purpose of these regulations, includes a public financial institution as defined under sub-section (72) of section 2 of the Companies Act, 2013, a non-banking financial company, public sector undertaking established under any Central or State enactment which has its debt securities listed or which seeks to list its debt securities on a
recognized stock exchange in accordance with the Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008, or any other issuer of debt securities in accordance with any Regulations issued by the
|2(b)||Companies Act||“Companies Act” means the Companies Act, 2013 (Act 18 of 2013).|
|2(ba)||debenture||“debenture” means a debenture within the meaning of sub section (30) of section 2 of the Companies Act, 2013.|
|2(f)||principal officer||““principal officer” means,—
A key managerial personnel as defined under sub section (51) of section 2 of the Companies Act, 2013, and shall include any person connected with the management or administration of the body corporate upon whom the Board has served notice of its intention of treating him as the principal officer thereof;
Other amendments in definition clauses
|Regulation||Term defined||Definition under Principal Regulations||Substituted/ Inserted definition||Remark|
|2(bb)||debenture trustee||means a trustee of a trust deed for securing any issue of debentures of a body corporate.||means a trustee appointed in respect of any issue of debentures of a body corporate.
|The amendment clarifies that appointment of DTs is not just in case of secured debentures, but even in case of unsecured listed debentures. So the definition should not be restrictive.|
|2 (e)||insurance company||means a company as defined in clause (21) of section 2 of the Companies Act.||has the same meaning assigned to it under sub-section (7A) of section 2 of the Insurance Act, 1938.||Reference made to Insurance Act instead of Companies Act.|
|2 (ea)||Issue||means an offer of sale of securities by any body corporate or by any other person or group of persons on its or their behalf, as the case may be, to the public, or the holders of securities of such body corporate or person or group of persons and includes a private placement of debentures made by a listed company, which are proposed to be listed.||means an offer of debentures by a body corporate, to the public, or the holders of securities of such body corporate and includes a private placement of debentures made by a body corporate, which seeks to list its debt securities on a recognized stock exchange||The definition of issue lacked absolute clarity, especially on account of words highlighted in bold.
The amended definition gives a clear meaning of word ‘issue’ for the purpose of listing of debentures. The definition now is aligned with the definition of issuer under ILDS Regulations which is as under:
(g) “issuer” means any company, public sector undertaking or statutory corporation which makes or proposes to make an issue of debt securities in accordance with these regulations or which has its securities listed on a recognized stock exchange or which seeks to list its debt securities on a recognized stock exchange;
|2 (ib)||Recognized stock exchange||No definition||shall have the same meaning assigned to it under sub-section (f) of section 2 of the Securities Contracts (Regulation) Act, 1956.||As the definition of ‘issue’ refers to recognized stock exchange, the term has ben defined|
Eligibility for being a Trustee (Regulation 7)
Regulation 7 of the Principal Regulations mandates that no person shall be entitled to act as a debenture trustee unless it is:
- scheduled bank carrying on commercial activity; or
- a public financial institution within the meaning of section 4A of the Companies
- Act, 1956; or
- an insurance company; or
- body corporate.
The Amendment Regulations amends Regulation 7 in order to align the meaning of a public financial institution and body corporate as per the definition provided under section 2(72) and 2(11) of the Act, 2013 respectively.
Obligation before appointment as debenture trustees [Regulation 13]
Regulation 13 of the Principal Regulation provides for obligation before appointment as debenture trustees. Clause (b) of Regulation 13 lays down the following requirements to be included in the written agreement entered under Regulation 13(a) with the body corporate by the debenture trustee:
- that the debenture trustee has agreed to act as such under the trust deed for securing an issue of debentures for the body corporate;
- the time limit within which the security for the debentures shall be created.
The Amendment Regulations substitutes the above requirements with the following clauses:
- an undertaking by the body corporate to comply with all regulations / provisions of Companies Act, 2013, guidelines of other regulatory authorities in respect of allotment of debentures till redemption;
- the time limit within which the security for the debentures shall be created or the agreement shall be executed in accordance with the Companies Act, 2013 or provisions as prescribed by any regulatory authority as applicable.
It was specifically discussed in the consultative paper that the DTs had expressed difficulty in impressing upon the issuer companies regarding various provisions prescribed by the regulatory authorities. Accordingly, an undertaking has been proposed to be incorporated in the agreement itself.
Debenture Trustee not to act for an associate (Regulation 13A)
Regulation 13A of the Principal Regulations prohibited a debenture trustee to act as a debenture trustee in case:
- it is an associate of the body corporate, or
- it has lent and the loan is not yet fully repaid or is proposing to lend money to the body corporate: xxx
The Amendment Regulations has, aligned the negative list with Rule 18 (2) (c) of Companies (Share Capital and Debentures) Rules, 2014 wherein a debenture trustee shall not be appointed as the trustee and has accordingly replaced sub clause (a) of Regulation 13A.
The amended list of cases is as follows:
- is an associate of the body corporate;
- beneficially holds shares in the company;
- is a promoter, director or key managerial personnel or any other officer or an employee of the company or its holding, subsidiary or associate company;
- is beneficially entitled to moneys which are to be paid by the company otherwise than as remuneration payable to the debenture trustee;
- is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company;
- has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon;
- has any pecuniary relationship with the company amounting to 2% or more of its gross turnover or total income or 50 lakh or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;
- is relative of any promoter or any person who is in the employment of the company as a director or key managerial personnel;
- is likely to have conflict of interest in any other manner:
Obligation of the Debenture Trustees (Regulation 14) & Omission of Schedule IV
Regulation 14 of the Principal Regulations mandated the debenture trustees to accept amongst other matters the trust deeds which contain the matters specified in Schedule IV to the Principal Regulations.
The Amendment Regulations has omitted Schedule IV to the Principal Regulations, as Act, 2013 prescribes content of Debenture Trust Deed, and has substituted Regulation 14 to align with Act, 2013, as it is more exhaustive, to read as follows:
- Every debenture trustee shall amongst other matters, accept the trust deeds which shall contain the matters as specified in section 71 of Companies Act, 2013 and Form No. SH.12 specified under the Companies (Share Capital and Debentures) Rules, 2014.
Duties of Debenture Trustees (Regulation 15)
The Amendment Regulations has substituted Regulation 15(1) of the Principal Regulation which enlists the duties to be carried out by a debenture trustee with a more exhaustive list of duties. This leads to an increased scope of duties and reporting requirements for a debenture trustee under Regulation 15.
Rationale provided in the consultative paper was as under
“The provisions of Reg. 15(1) of the SEBI (DT) Regulations are almost similar to the provisions of Section 71 of Companies Act, 2013 and Rule 18(3) of The Companies (Share Capital and Debentures) Rules, 2014.
Hence, sub-regulation 15(1) (a) to (n) are similar to Companies Act, 2013. However, (o) (p) (q), (r)& (s) are added to the proposed regulations considering existing regulations i.e. 15(1) (c), (j), (g), (l)and (i), respectively, which are not included in the Companies Act, 2013.
The issuer companies sometimes take the plea that certain data is required to be approved by the Board in their Board Meeting and they can submit the reports only after the Board Meeting. To ensure timely submission of data, definite time frame is needed to be mandated so that the point of time is crystallised for getting reports from the issuer companies.
Further, new provision at point no. ‘t’, is proposed to be incorporated, mandating the DT to obtain certain certificates on quarterly and annual basis, in case where listed debt securities are secured by way of receivables/ book debts.
These Certificates shall ensure the adequacy of the Receivables which are the substantial security given by NBFCs/HFCs etc. Therefore, for the purpose of harmonization with Companies Act, 2013, it is proposed to amend Regulation 15 (1) of SEBI (DT) Regulations as stated”
Further, Regulation 15(1A) of the Principal Regulations mandates the debenture trustee to obtain a certificate from the issuer’s auditor in respect of:
- utilisation of funds during the implementation period of the project; and
- in the case of debentures issued for financing working capital, at the end of each accounting year
The consultative paper explained that since the Prinicipal Regulations referred to ‘issuers auditors’, the issuers insist on providing certificate from ‘Internal Auditors‘, ‘Concurrent Auditors’, etc. and not Statutory Auditors. Since, the Statutory Auditor has fiduciary duties towards the Shareholders of the Company and they are in a better position to comment on the financial position of the Company, it was proposed to modify the clause to mandate the Debenture Trustees to obtain certificate of end utilisation of issue proceeds from the Statutory Auditor of the issuer company.
The Amendment Regulations, 2017 replaces the words ‘auditors’ with the words ‘Statutory Auditors’ and hence, the certificate shall be obtained mandatorily from the Statutory Auditors of the issuer.
Maintenance of books of account, records, documents, etc (Regulation 17)
Regulation 17(1) of the Principal Regulations mandates the debenture trustees to keep and maintain proper books of account, records and documents, relating to the trusteeship functions for a period of not less than five financial years preceding the current year.
The Amendment Regulations substituted Regulation 17(1) in view of investor grievance or complaints that may arise, to read as follows:
“Subject to the provisions of any law every debenture trustee shall keep and maintain proper books of account, records and documents, relating to the trusteeship functions for a period of not less than five financial years from the date of redemption of debentures.”
Appointment of Compliance Officer (Regulation 17A)
Regulation 17A of the Principal Regulations mandates the appointment of a Compliance Officer who shall:
- be responsible for monitoring the compliance of the SEBI Act, 1992, rules and regulations, notifications, guidelines, instructions, etc., issued by SEBI or the Central Government and for redressal of investors’ grievances;
- immediately and independently report to SEBI any non-compliance observed by him;
- report any non-compliance, of the requirements specified in the listing agreement with respect to debenture issues and debenture holders, by the body corporate to the SEBI\
The Amendment Regulations inserts sub-regulation (4) to additionally mandate the Compliance Officer to obtain certification in terms of the Securities and Exchange Board of India (Certification of Associated Persons in the Securities Markets) Regulations, 2007 or as may be specified by SEBI.
This is on account of requirement under SEBI notification dated March 11, 2013 issued under Regulation 3 of the SEBI (Certification of Associated Persons in the Securities Markets) Regulations, 2007, that mandates certification requirement for the associated persons functioning as compliance officers of debenture trustee.
Liability for action in case of default (Regulation 25)
Regulation 25 of the Principal Regulations enlists the cases of default which may be made by a debentures trustee and provided for the liability in such cases.
The Amendment Regulations, 2017 substituted Regulation 25 of the Principal Regulation with a much wider number of cases in order to align with other SEBI Regulations so as to have consistency.
However, the manner in which such defaults are to be dealt with has not been changed by the Amendment Regulations and it remains to be as per the provisions under the Securities and Exchange Board of India (Intermediaries) Regulations, 2008
Alignment with Act, 2013 is surely preferred for ease of reference and compliance. Other changes in accordance with consultative paper is also a welcome step towards addressing the “Challenges in performing the obligations and duties as Debenture Trustees to protect the interests of the debenture holders’ for which the task force of SEBI officials and representatives of Debenture trustees was originally set up.
by Vignesh Iyer (firstname.lastname@example.org)