# Debenture Trustee – Appointment, Conditions & Disqualifications

## 1. When is Appointment Mandatory? [Section 71(5)]

Before issuing a prospectus or making an offer / invitation to the public or to its members exceeding 500 for subscription of its debentures, the company shall appoint one or more debenture trustees.

## 2. Procedural Conditions [Rule 18(2)]

### (a) Disclosure of Name & Written Consent

Names of debenture trustees shall be stated in offer-related letters and notices, or subsequent thereto.
Written consent must be obtained BEFORE appointment.
A statement to that effect shall appear in the letter of offer.

## 3. Disqualifications – Who CANNOT be a 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, its holding, subsidiary or associate company.
3	Is a relative of any promoter, director or KMP of the company.
4	Is a beneficiary entitled to monies payable by the company OTHER than the remuneration payable to the debenture trustee.
5	Is indebted to the company, or its subsidiary, holding or associate company, or a subsidiary of such holding company.
6	Has furnished any guarantee in respect of the principal debt secured by debentures or interest thereon.
7	Has any pecuniary relationship with the company amounting to 2% or more of its gross turnover/total income, OR ₹50 lakh (or higher amount prescribed), whichever is LOWER, during the two preceding FY or current FY.
8	Is a relative of any promoter or any person in the employment of the company as director or KMP.

## 4. Memory Aid – 'PRINCIPLE'

Pecuniary relationship beyond limits
Relative of promoter/director/KMP
Indebted to the company/group
Notable beneficiary (other than as trustee)
Concerned officer/employee of the company/group
Insider shareholder (beneficial holder of shares)
Providing guarantee for debt/interest
Linked employment (relative of person employed as director/KMP)

Worked example

### Example 1

Q. Bright Ltd. proposes a public issue of debentures and intends to appoint Mr. X, who holds 100 equity shares of the company in his own name, as a debenture trustee. Is this permissible?

A. No. Rule 18(2)(b) bars a person who beneficially holds shares in the company from being appointed as debenture trustee. The fact that the shareholding is small is irrelevant; the disqualification is absolute.

### Example 2

Q. Cloud Ltd. is offering debentures to 600 of its existing members through a private placement. Is appointment of debenture trustee compulsory?

A. Yes. Section 71(5) makes appointment of debenture trustee mandatory where the offer/invitation is to MEMBERS EXCEEDING 500 – irrespective of whether the route is public or private placement.

⚠️ Common exam mistakes

Treating the 500-member threshold as relevant only for public offers. It triggers trustee appointment even for invitations made to existing members.
Forgetting the 'lower of' test in the pecuniary disqualification: 2% of turnover OR ₹50 lakh – whichever is LOWER.
Confusing 'relative of KMP/director' (disqualified) with 'KMP/director himself' – both are disqualified, but for different sub-clauses.
Overlooking that PRIOR WRITTEN CONSENT must be obtained from the trustee – not subsequent ratification.

Bare-Act text Section 71(5) & Rule 18(2) of Companies (Share Capital and Debentures) Rules, 2014 · The Companies Act, 2013 · 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.

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Debenture Trustee – Appointment & Disqualifications [Section 71(5) & Rule 18(2)]

Worked example

⚠️ Common exam mistakes