• PAGE ONE
• INDEX
• HOME

Debenture-holders in the dock

N. Sridharan

THE Companies Amendment Act, 2000 has, in addition to the existing Section 117 on debentures, added three more Sections -- 117A, 117B and 117C. This amendment came into force with effect from December 13, 2000. Before the amendment, listed companies had to follow only the SEBI (Disclosure and Investor Protection) Guidelines, 2000, which deal with appointment of debenture-trustee, trustee's duties and powers, creation of security and debenture redemption reserve, and the SEBI (Debenture Trustees) Rules a nd Regulations, 1993, which outline the various functions of a debenture-trustee. The new amendments are applicable to both listed and non-listed companies.

As per the newly introduced Section 117A of the Act, to secure any issue of debentures, a trust deed shall be in such form and executed within such periods as may be prescribed. Further, any member or debenture-holder of the company can inspect the trust deed and obtain copies of the same on payment of the prescribed amount. If any member/debenture-holder is not allowed to inspect, or obtain copies of, the trust deed, the company and every officer who is in default shall be punishable for each offence w ith fine which may extend to Rs 500 for each day during which the offence continues.

The appointment and duties of the trustees are dealt with in Section 117B of the Act. As per the section, a company, before issuing a prospectus or letter of offer to the public for subscription of its debentures, is required to fulfil the following cond itions:

i) appoint one or more debenture-trustees for such debentures; and

ii) state on the face of the prospectus or letter of offer that the trustees have given their consent to be so appointed.

This is subject to the further condition that a person shall not be appointed as a trustee if he: a) beneficially holds shares in the company; b) is beneficially entitled to monies which are to be paid by the company; and c) has entered into any guarante e in respect of principal debts secured by the debentures or interest thereon.

The section also lays down that, subject to the provisions of the Act, the functions of the trustee shall generally be to:

* protect the interests of the debenture-holders (including creation of securities within the stipulated time); or

* redress the grievances of the debenture-holders.

In addition, the debenture-trustee may take any of the following steps, as he may deem fit, to:

* ensure that the assets of the company issuing debentures and each of the guarantors are sufficient to discharge the principal amount at all times;

* satisfy himself that the prospectus or the letter of offer does not contain any matter which is inconsistent with the terms of the debentures or with the trust deed;

* ensure that the company does not commit any breach of the covenants and provisions of the trust deed;

* take such reasonable steps to remedy any breach of covenants of the trust deed or the terms of issue of the debentures;

* take all steps to call a meeting of debenture-holders as and when such meeting is required to be held.

Thus, the amendment will not only make the trustees active but also protect the interests of the debenture-holders.

If the trustee considers at any time that the assets of the company are insufficient or likely to be insufficient to discharge the principal amount as and when it becomes due, he may file a petition before the Company Law Board (CLB). The CLB may, after hearing the company and any other person, by an order, impose such restrictions on the incurring of any further liabilities as it thinks necessary in the interest of the debenture-holders.

The marginal heading of Section 117C talks of the liability of the company to create a security and debenture redemption reserve. However, this section does not make any provision regarding creation of security. In respect of debentures issued after the commencement of the Act, that is, after December 13, 2000, the company is required to create a debenture redemption reserve for the redemption of the debentures.

The company shall pay interest and redeem the debentures in accordance with the terms and conditions of the debenture trust deed. If a company fails to redeem the debentures on the due dates, any or all the debenture-holders can make an application to th e CLB. The CLB, after hearing the parties, may direct the company to redeem the debentures forthwith by payment of principal and interest due thereon.

Every officer of the company who is in default shall be punishable with imprisonment, which may extend to three years, as also a fine which shall not be less than Rs 500 for every day during which the default continues.

The SEBI Guidelines have stipulated stringent provisions for protecting the interests of debenture-holders which, among other things, include the following:

*Trustees to the debenture issue shall be vested with the requisite powers for protecting the interests of the debenture-holders, including a right to appoint a nominee director on the board of the company in consultation with institutional debenture-hol ders.

*The lead institution/investment institution will monitor the progress in respect of the debentures for project finance.

*The trustees will supervise the implementation of the conditions regarding creation of security for the debentures and regarding the debenture redemption reserve.

It must be noted that the Act has not incorporated the SEBI Guidelines. Also, the debentures issued before the amendment are governed by the provisions of the debenture trust deed executed between the debenture-trustee and the company. These debenture-ho lders may either exercise remedies given by the debenture trust deed or apply to the court to exercise their rights. No measures have been introduced to redress the grievances of debenture-holders who are not covered by the amendment.

There are many companies which have neither redeemed the debentures nor paid interest. Section 274(1)(g) of the Act has penal provision for non-redemption of debentures for more than one year, that is by disqualifying the directors from being appointed i n other companies as directors. This provision is not good enough for the standpoint of debenture-holders, whose basic concern is the redemption of their debentures and interest due thereon. They are also helpless when companies register with the BIFR. T hey have to accept whatever rehabilitation package the BIFR hands out.

As a secured creditor, a debenture-holder is allowed to move the CLB only for the non-redemption of debentures and not for the non-payment of interest. Further, the Act has not described precisely the creation of security and when it should be made.

Normally, the assets of a company are given by way of a second charge to financial institutions (FIs) and are invariably based on pari passu charges. After the debts are paid to FIs and banks, virtually nothing is left for the debenture-holder. To avoid this and to protect the interests of the debenture-holders, the amendment should have offered a better deal to them.