Debenture Trustee - Appointment and Disqualifications
# Appointment of Debenture Trustee [Section 71(5) read with Rule 18(2)]
## Statutory Trigger [Section 71(5)]
Prior to issuing a prospectus or making an offer or invitation to the public or to its members exceeding 500 for subscription of debentures, the company shall appoint one or more debenture trustees.
## Procedural Requirements [Rule 18(2)]
### a. Name and Consent of Debenture Trustee
1. Disclosure: Names of debenture trustees shall be stated in offer-related letters and notices, or subsequent thereto.
2. Written Consent: Written consent must be obtained from the debenture trustee BEFORE appointment.
3. Statement in Letter of Offer: A statement to the effect that written consent has been obtained shall appear in the letter of offer.
## b. Who CANNOT be Appointed as Debenture Trustee?
A person shall NOT be appointed as a debenture trustee if he:
#
Disqualification
1
Beneficially holds shares in the company
2
Is a promoter, director, or KMP or any other officer/employee of the company OR its holding, subsidiary, or associate company
3
Is beneficially entitled to moneys to be paid by the company otherwise than as remuneration payable to the debenture trustee
4
Is indebted to the company, or its subsidiary or its holding or associate company, or a subsidiary of such holding company
5
Has furnished any guarantee in respect of principal debts secured by the debentures or interest thereon
6
Has any pecuniary relationship with the company amounting to: 2% or more of its gross turnover or total income OR Rs. 50 lakhs (or higher amount as prescribed) — whichever is lower — during the two immediately preceding FYs or the current FY
7
Is a relative of any promoter or any person in employment of the company as director or KMP
### Why These Disqualifications?
The debenture trustee acts as a fiduciary for the debenture holders. Any conflict of interest with the company would compromise the trustee's ability to protect debenture holders' interests. Hence, the law enforces strict independence.
## Trigger Test for Appointment of Trustee
```
Is the offer being made to:
→ Public (general)? → YES → Appoint Debenture Trustee
→ Members exceeding 500? → YES → Appoint Debenture Trustee
→ Members up to 500 only? → NO trustee required under Sec 71(5)
```
## Independence Test for Debenture Trustee
```
Proposed Trustee — Is he/she:
• Beneficial shareholder of company? → DISQUALIFIED
• Promoter/Director/KMP/Employee/Officer
(of company or its group entities)? → DISQUALIFIED
• Beneficiary of payments (other than fees)? → DISQUALIFIED
• Indebted to company/its group? → DISQUALIFIED
• Guarantor of debenture debt/interest? → DISQUALIFIED
• Has pecuniary relationship ≥ lower of
(2% of turnover/income OR Rs. 50 lakhs)? → DISQUALIFIED
• Relative of promoter/director/KMP? → DISQUALIFIED
```
Worked example
### Example 1
Example 1: XYZ Ltd. proposes to issue debentures by way of private placement to 450 of its members. Is appointment of a debenture trustee mandatory under Section 71(5)?
Answer: No. Section 71(5) mandates appointment of a debenture trustee only when the offer is made to (a) the public, or (b) members exceeding 500. Since the offer here is to only 450 members (which is less than 500) and is not a public offer, appointment of a debenture trustee is NOT mandatory under Section 71(5).
### Example 2
Example 2: ABC Ltd., a listed company, proposes to appoint Mr. P as debenture trustee. Mr. P's wife holds 1,000 shares in ABC Ltd. as beneficial owner. Can Mr. P be appointed?
Answer: No. Under Rule 18(2)(c)(vii), a person who is a RELATIVE of any promoter or any person in employment as director/KMP is disqualified. Additionally, since Mr. P's wife beneficially holds shares — and 'beneficial holding' by family members may be imputed depending on facts — and considering the broader spirit of independence required, the appointment would not be valid if construed as conflict of interest. A safer course is to appoint an independent trustee with no family or pecuniary connection to the company.
### Example 3
Example 3: PQR Ltd. wishes to appoint Mr. Q as debenture trustee. Mr. Q has given a personal guarantee to a bank for a loan availed by PQR's subsidiary. Can he be appointed?
Answer: This requires careful analysis. Rule 18(2)(c)(v) disqualifies a person who has 'furnished any guarantee in respect of the PRINCIPAL DEBTS SECURED BY THE DEBENTURES or interest thereon.' If Mr. Q's guarantee is for a separate bank loan (NOT the debenture debt), this specific disqualification does not apply. However, indirect financial relationships should be evaluated against the 2%/Rs. 50 lakh pecuniary relationship test under Rule 18(2)(c)(vi).
⚠️ Common exam mistakes
Triggering appointment only when offer is made to public — appointment is also required when offer is to members EXCEEDING 500.
Counting 500 as inclusive — Section 71(5) says 'exceeding 500', meaning 501 or more triggers the requirement.
Forgetting that disqualifications cover not just the company but also its HOLDING, SUBSIDIARY, and ASSOCIATE companies.
Applying the higher of 2% turnover OR Rs. 50 lakhs — the test uses WHICHEVER IS LOWER.
Treating remuneration payable to debenture trustee as a disqualifying 'beneficial entitlement' — this is specifically excepted (legitimate trustee fees do not disqualify).
Overlooking the requirement to obtain WRITTEN CONSENT of the trustee before appointment.
Bare-Act text Section 71(5) read with Rule 18(2) · Companies Act, 2013 and Companies (Share Capital and Debentures) Rules, 2014 · click to expand
Section 71(5): No company shall issue a prospectus or make an offer or invitation to the public or to its members exceeding five hundred for the subscription of its debentures, unless the company has, before such issue or offer, appointed one or more debenture trustees and the conditions governing the appointment of such trustees shall be such as may be prescribed.
Rule 18(2) of Companies (Share Capital and Debentures) Rules, 2014: The company shall appoint debenture trustees, after complying with the following conditions, namely:—
(a) the names of the debenture trustees shall be stated in letter of offer inviting subscription for debentures and also in all the subsequent notices or other communications sent to the debenture holders;
(b) before the appointment of debenture trustee or trustees, a written consent shall be obtained from such debenture trustee or trustees proposed to be appointed and a statement to that effect shall appear in the letter of offer issued for inviting the subscription of the debentures;
(c) A person shall not be appointed as a debenture trustee, if he—(i) beneficially holds shares in the company; (ii) 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; (iii) is beneficially entitled to moneys which are to be paid by the company otherwise than as remuneration payable to the debenture trustee; (iv) is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company; (v) has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon; (vi) has any pecuniary relationship with the company amounting to two per cent or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year; (vii) is relative of any promoter or any person who is in the employment of the company as director or key managerial personnel.