Consultation Paper on clarification of term “Pecuniary Relationship” of Debenture Trustees (DT) as per Regulation 13A of DT Regulations. - MMJC

1. The Securities and Exchange Board of India (SEBI) issued a Consultation Paper (‘CP’) on August 22, 2024 seeking public comments on the clarification of the term “pecuniary relationship” in the context of eligibility of a DT to provide DT services.

Background

Under Regulation 13A of the DT Regulations an entity cannot be appointed as a DT if:

a). Regulation 13A:

A person shall not be appointed as a debenture trustee, in case-

(a) the debenture trustee, –

…….

(iv) is beneficially entitled to moneys which are to be paid by the company otherwise than as remuneration payable to the debenture trustee;

……….

(vii) has any pecuniary relationship with the company amounting to 2% or more of its gross turnover or total income or ₹50 lakh or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;

……”

Further Rule 18(2)(c) of Companies (Share Capital and Debentures) Rules, 2014 (‘SCD Rules’) inter-alia reads as under:

“(c) A person shall not be appointed as a debenture trustee, if he— …………

(iii) is beneficially entitled to moneys which are to be paid by the company otherwise than as remuneration payable to the debenture trustee; ……………

(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;

DT regulations and SCD rules state that DT having pecuniary relationship can’t provide services as DT.

Why clarification is required and what is the clarification required?

• SEBI constituted working group in order to provide ease of doing business under DT regulations raised concerns about whether the remuneration paid by issuers to DTs for their services as DTs should be included in the calculation of the ‘pecuniary relationship’? There was a lack of clarity on whether remuneration paid for services of DT would form part of this relationship when determining the DT’s eligibility?
• Upon reviewing Rule 18(2)(c)(iii) of the SCD Rules and Reg 13A(a)(iv) working group deliberated that Companies act and DT regulations always had a view that remuneration payable to DT shall be excluded while determining pecuniary relationship.  
• Taking this into account the working group recommended that remuneration payable to DTs should be excluded from the pecuniary relationship calculation.
• To resolve this ambiguity, the working group recommended that SEBI provide a formal clarification to exclude the remuneration payable to DTs from the calculation of the pecuniary relationship under Regulation 13A(a)(vii) of the DT Regulations. This would align the SEBI provisions with the Companies Act and ensure that the same rule applies under both frameworks.
• Further, the working group also recommended that issuer should be required to disclose, in the offer documents, the remuneration or revenue received by the DT for debenture trusteeship services as a percentage of the total remuneration or revenue received from all services provided by the DT to the issuer over the last three financial years. This is aimed at increasing transparency.

Proposals for public comments:

• It is proposed that remuneration paid to DTs by issuers shall not be included when calculating the pecuniary relationship as per Regulation 13A(a)(vii) of the DT Regulations.
• Issuer must disclose in their offer document the percentage of revenue the DT received from debenture trusteeship services, relative to the total revenue earned from the issuer across all services (including non-DT services) over the last three financial years.
• To better understand the proposed disclosure requirement, the following illustration is provided in the paper:
  • The remuneration/revenue received by the DT from the issuer in respect of debenture trusteeship services for the last three financial years is ₹3 lakh.
  • The revenue received by the DT for services other than debenture trusteeship from the same issuer over the last three years is ₹12 lakh.
  • Total revenue from the issuer for all services = ₹3 lakh (DT services) + ₹12 lakh (non-DT services) = ₹15 lakh.
  • Thus, the percentage of remuneration for debenture trusteeship services to be disclosed in the offer document would be: 3 lakh/15 lakh×100=20%
  • Hence, the offer document should disclose that 20% of the revenue received by the DT from the issuer is for debenture trusteeship services.

• The exclusion of remuneration from the calculation of pecuniary relationships and the new disclosure requirements will likely reduce the burden on DTs while ensuring transparency in their financial dealings with issuers.
• This Consultation paper is open for public comment latest by September 11, 2024.