The Evolving Role and Liability of Debenture Trustees in India’s Debt Market

Introduction

In the past decade, corporate financing in India has undergone substantial transformations leading to an increased reliance on privately placed Non-Convertibles Debentures as a viable source of funding. The role of Debenture Trustees (“DTs”) has undergone a perceptible change, reinforced by regulatory interventions. While DTs were largely perceived as mere intermediaries, they are now positioned within a broader framework of regulatory obligations, fiduciary duties, and potential liabilities.

The impetus for these changes stems from a series of corporate defaults in the debt markets which demonstrated inefficient over sight. In this article, we attempt to unfold the expanding role of DTs in India and the emerging liability risks under the evolving regulatory landscape shaped by the Securities and Exchange Board of India (“SEBI”) and Reserve Bank of India.

The Regulatory Framework

The regulatory framework governing debenture trustees in India encompasses multiple statutes and guidelines, each defining the scope of their responsibilities. Section 71(3) of the Companies Act, 2013 (“Act”)stipulates that a company may issue secured debentures in accordance with the manner set out in Rule 18 of Companies (Share Capital and Debentures) Rules,2014 which states that a company shall appoint the debenture trustee before the issue of prospectus or letter of offer for subscription of its debentures and not later than sixty days after the allotment of the debentures.^[1] In addition, the SEBI (Debenture Trustees) Regulations, 1993, as amended from time to time (“SEBI DT Regulations”), lays down the eligibility criteria, duties, and obligations of the DTs. Over the years, SEBI has supplemented these regulations with a series of circulars and operational guidelines, which have significantly expanded the scope of trustees’ responsibilities, requiring them to actively monitor compliance, security creation, and investor disclosures.

Further, the Reserve Bank of India directions apply particularly to trustees overseeing issuances by non-banking financial companies. These directives require trustees to align their practices with SEBI’s framework to ensure investor protection, particularly in systemically important debt issuances.

Are Debenture Trustees Fiduciaries?

The National Consumer Disputes Redressal Commission (“NCDRC”) has explicitly recognized the fiduciary nature of a debenture trustee's role. In Central Bank of India v. Tadepalli Padmaja and Ors. ^[2], NCDRC stated unequivocally: “At the outset, it is to be stated that the Debenture Trustee, Central Bank of India, stood in a fiduciary relationship with the debenture holders to secure their debentures in terms of the trust deed”.

The NCDRC drew upon general principles of trust law, citing Halsbury's Laws of England, which states that “the trustee holds the property or must exercise his rights of property in a fiduciary capacity, and stands in a fiduciary relationship to the beneficiary”.^[3] The NCDRC further emphasized that trustees must execute their trust with reasonable diligence and conduct affairs as an ordinary prudent person would conduct their own affairs. This fiduciary character is reinforced by section 71 (5) of the Act which states that the debenture trustee shall take steps to protect the interests of the debenture-holders and redress their grievances in accordance with such rules as may be prescribed.

Extending Beyond Contractual Terms

The regulatory framework governing DTs in India demonstrates that their responsibilities are not confined merely to the four corners of a trust deed. Instead, multiple statutory and regulatory provisions impose obligations that override contractual limitations and embed broader fiduciary standards of conduct.

Nullification of Exemption Clauses under the Companies Act, 2013

Section 71 (7) of the Act^[4] (applicable to trustees under various instruments, including debentures) expressly invalidates any clause in a trust deed that purports to exempt trustees from liability in cases of breach of trust where such breach arises from failure to exercise due care and diligence.

Continuous Monitoring Obligation under SEBI(Debenture Trustees) Regulations, 1993

SEBI has imposed stringent ongoing monitoring responsibilities. Regulation 15(1)(c) of the SEBI DT Regulations mandates that DTs must “ensure on a continuous basis that the property charged to the debentures is available and adequate at all times to discharge the principal and interest thereon.” This is not a one-time or periodic obligation but a continuous one, reflecting SEBI’s policy to impose active, ongoing vigilance rather than passive oversight. Notably, this obligation exists independently of the specific terms negotiated in the trust deed meaning that trustees cannot absolve themselves by pointing to contractual silence or limitations.

Proactive Protection of Debenture Holders’ Interests

Regulation 15(1)(p) of the SEBI DT Regulations further extends the trustee’s role by requiring them “to take appropriate measures for protecting the interest of the debenture holders as soon as any breach of the trust deed or the law comes to their notice.” This provision is noteworthy fortwo reasons, firstly, it imposes a triggered duty once a breach is detected, immediate action is mandated, secondly, the broad scope covers breaches of not only the trust deed but also of applicable law, thereby compelling trustees to monitor legal compliance beyond the contractual framework. Thus it can be reasonably construed that trustees are not mere contract enforcers, but are also watchdogs for compliance across legal and regulatory domains.

Regulatory Reforms in Recent Years

A key feature of recent reforms in debenture trusteeship has been the strengthening of due diligence obligations. Chapter II of the SEBI Master Circular for Debenture Trustees^[5], read with Regulation 13 of the SEBI DT Regulations, requires trustees to verify security creation, examine title documents, and certify adequacy of asset cover before issuance ensuring investor protection ab initio. Chapter III extends this duty beyond issuance, mandating continuous monitoring of security cover, financial covenants, and compliance, thus shifting oversight from episodic to sustained fiduciary supervision.

SEBI has also standardized due diligence certifications. Under its circular dated 28 January 2025, trustees must now provide certificates at the stage of draft offer document. These confirm compliance with disclosures, covenants, and documentation, enabling early detection of deficiencies.

Earlier, the August 2022 circular^[6]introduced stricter timelines for security registration and mandated supplemental trust deeds to align contractual and regulatory obligations. Alongside, SEBI adopted technological monitoring through Distributed Ledger Technology platforms, requiring unique asset IDs, half-yearly auditor certifications of security cover, and centralized tracking of compliance. Collectively, these measures elevate the standard of care expected from trustees, who must now exercise proactive, ongoing supervision supported by systems and board-level accountability.

The consolidation culminated in the Master Circular for Debenture Trustees, 2025 dated 13 August 2025^[7], which superseded all earlier circulars to create a single chapter-wise framework. It rein forced obligations on trustees to maintain adequate infrastructure bearing ultimate responsibility signifying SEBI’s expectation that trustees act not merely as contractual agents but as fiduciaries with systemic investor-protection duties.

Conclusion

There is no doubt that the perception of DTs has undergone a significant change which can be rightfully adduced to considerable reform introduced by regulatory authorities in the past two decades.  While these reinforced responsibilities and statutory obligation are in consonance with interest of the investors, DTs are now subjected to heightened accountability and potential liability.

The expanding role of DTs can be attributed to the introduction of stronger due diligence and risk management practices which consequently helps in attracting a broader base of investors to the debt market. In simple terms, the close interaction between the regulatory framework and the trustee’s custodial role creates a system that places investors rights and interests at the forefront, even within the complexities of modern financial markets.

References

[1] Section 71 of Companies Act, 2013

[2] Central Bank of India v. Tadepalli Padmaja and Ors, 2008 Law Suit (Trib) 3256

[3] Trusts and Powers (Volume 98 (2024)) https://www.lexisnexis.co.uk/legal/commentary/halsburys-laws-of-england/trusts-powers

[4] Section 71 of Companies Act, 2013

[5] Master circular SEBI/HO/DDHS-PoD-1/P/CIR/2025/117dated August 13, 2025

[6] Circular No. SEBI/HO/DDHS/DDHS_Div1/P/CIR/2022/106dated August 04, 2022

[7] Master circular SEBI/HO/DDHS-PoD-1/P/CIR/2025/117dated August 13, 20252025

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