Creation of Security in favour of Debentureholders
neelam desai
(Querist) 28 August 2008
This query is : Resolved
Can anyone share the checklist of procedures and documents required for creation of security in favour of Debentureholders?
Prakash Yedhula
(Expert) 13 March 2009
In the case of public issue of debentures, there would be a large number of debenture holders on the register of the company. As such it shall not be feasible to create charge in favour of each of the debenture holder. A common methodology generally adopted is to create a Trust Deed conveying the property of the company.
A Debenture Trust Deed shall include the following:
i) An undertaking by the company to pay the Debenture holders, principal and interest.
ii) Clauses giving the Trustees the legal mortgages over the company's freehold and leasehold property.
iii) Clauses that may make the security enforceable in the event of default in payment of principal or interest i.e. appointment of receiver, foreclosure, sale of assets etc.
iv) A clause giving the Trustees the power to take possession of the property charged when security becomes enforceable.
v) Register of Debenture holders, meeting of all debenture holders and other administrative matters may be included in the Deed.
In addition thereto, the SEBI regulations have laid a format of the Trust Deed in Schedule IV to the regulations. Some of the important provisions would include
vi) Time limit of creation of security for issue of debentures.
vii) Obligations of the body corporate towards the debenture holders.
viii) Obligations towards the debenture holders - equity ratio and debt service coverage ratio.
ix) Procedure for the inspection of charged assets by the Trustees.A trust deed is created under which some of the debenture holders are appointed as trustees for the benefits of the debenture holders.
The appointment of the trustees has to be made before making a debenture issue and their consent to act as such has to be mentioned on the face of the prospectus or letters of offer.
The Trustees declare the Trust in favour of the debenture holders. The Trust Deed may grant the Trustees fixed charge over thefreehold and leasehold property while a floating charge may be created over other assets.
The Company shall allow inspection of the Trust Deed and also provide copy of the same to any member or debenture holder of the company on payment of such sum as may be prescribed.
Failure to provide the same would invite penalties by way of fine under the Act. Any provision contained in the Trust Deed, which exempts a Trustee from liability for breach of Trust, is void
