A debenture is a debt instrument issued by a company, acknowledging its obligation to repay the borrowed amount at a specified interest rate. It serves as one of the primary means through which a company raises loan capital. Although the funds raised through debentures become part of the company’s capital structure, they do not constitute share capital. Essentially, a debenture functions as a loan certificate or bond, evidencing the company’s liability to repay a specific sum along with periodic interest.
The debenture trustee and bond trustee are essentially the same entity. The terms are often used interchangeably to refer to the person or entity appointed to represent and protect the interests of bond or debenture holders. Debentures and bonds are both types of debt instruments issued by companies or governments to raise capital, and the trustee’s role is to ensure the issuer fulfills its obligations to the bondholders. The primary difference between a bond trustee and a debenture trustee lies in the type of instrument they oversee like bonds or debentures.
Commercial banks often act as debenture trustees, or Bond Trustees providing a critical layer of security and oversight for debenture holders. Their role includes ensuring regulatory compliance, monitoring the creation and maintenance of security, facilitating communication between issuers and investors, and enforcing obligations in the event of default. They are also responsible for addressing investor grievances and ensuring the timely disbursement of interest and principal payments.
To serve as a debenture trustee or bond Trustee, an entity—such as a commercial bank—must be registered with the Securities and Exchange Board of India (SEBI) under the relevant regulatory framework.
Banks earn income through debenture trustee services by levying fees for various activities performed for both issuing companies and investors. These activities encompass a wide range of services, all aimed at safeguarding investor interests and ensuring smooth execution of the debenture issuance process. Additional income may be generated from trust fund interest, custodial services, and legal facilitation.
Key Revenue Sources for Banks from Debenture Trustee Services
- Advisory Services
Banks offer advisory services to issuing companies on structuring debentures, security creation, trust deed registration, and compliance with SEBI and other statutory regulations. - Documentation and Due Diligence Fees
Fees are charged for drafting, verifying, and processing legal documents associated with the debenture issuance. - Security Creation and Custody Fees
Banks may charge for overseeing the creation of security and holding related documentation on behalf of debenture holders. - Compliance Monitoring Fees
Fees are earned for monitoring adherence to statutory requirements, including SEBI guidelines, listing agreements, and provisions of the Companies Act. This also includes oversight of interest payments and principal redemption. - Investor Servicing Fees
- Investor Protection: Acting as an intermediary between the issuer and debenture holders, the trustee safeguards investor interests.
- Information Dissemination: Banks may charge for communicating key updates, such as rating changes or payment schedules.
- Grievance Redressal: Handling and resolving investor complaints is another monetized service.
- Security Enforcement: In the event of issuer default, banks can charge fees for initiating recovery proceedings and enforcing collateral.
- Additional Income Streams
- Custodial Services: Banks earn fees by safekeeping debenture-related documents and assets.
- Interest on Trust Accounts: Trustees may temporarily hold a portion of debenture proceeds in designated trust accounts, generating interest income.
- Transaction-Related Fees: Banks may also assist in the legal formalities surrounding the debenture issuance process, such as registration of the trust deed, for which additional charges are levied.
Regulatory Framework
In India, debenture trustees are governed by the SEBI (Debenture Trustees) Regulations, 1993. According to SEBI mandates, all public or rights issues of debentures with a maturity exceeding 18 months must appoint a registered debenture trustee. The trustee’s name must also be disclosed in the issue prospectus.
