SEBI clarifies on Appointment of Director Nominated by Debenture Trustee for Non-Company Issuers

The Securities and Exchange Board of India(“SEBI”) clarified the appointment of Debenture Trustee (“DT”) nominee for non-company issuers vide Circular No. SEBI/HO/DDHS/POD1/P/CIR/2023/112 dated July 04, 2023, (“Circular”) issued with immediate effect.​¹ The Circular has introduced positive changes to the existing regime wherein, the non-company issuers shall submit an undertaking to their DTs that a non- executive/independent director/trustee/member of the governing body shall be designated as nominee director.

EXISTING POSITION: -
Regulation 23(6) of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021(“NCS Regulations”) obligates an issuer company under the Companies Act, 2013 to ensure that its Articles of Association (“AOA”)requires its Board of Directors to appoint a nominee director of the DT in the event of​²:-

1. two consecutive defaults in payment of interest to the debenture holders; or
2. default in the creation of security for debentures; or
3. default in the redemption of debentures.

The Circular has categorised three sets of issuers that do not have any obligation to appoint directors nominated by DTs. These are as follows:

1. Issuers incorporated under different statutes or are also regarded as ‘other regulators’- Government entities and financial institutions are some of the non-company issuers that are not governed by the Companies Act, 2013. These issuers cannot execute the amendments introduced in the NCS Regulations as their board composition is governed by statutes that do not provide for the appointment of nominee directors by trustees.


2. Issuers governed by Statutes that require prior approval of the President of India- The Public Sector Undertakings (“PSU”)and entities involved in defense or national security are some of the issuers that require prior approval of the President of India for appointment of any directors in the boards.


3. Issuers unable to appoint Nominee Directors- There are several issuers that are unable to appoint Nominee Directors on their boards as their principal document/charter does not provide for the same. Furthermore, the absence of a statutory mandate in a few cases prevents the issuers from amending their principal document.

After considering the representations and issues raised by the DTs, and the similarities in roles and responsibilities of a nominee director with any other director on Board, SEBI clarified that the issuers falling under the three above-mentioned categories shall submit an undertaking to their DTs that in case of events provided in Regulation 15(1)(e) of the DT Regulations, a non-executive/independent director/trustee/member of its governing body shall be designated as nominee directors for the purposes of Regulation 23(6) of the NCS Regulations. The same shall be done in consultation with the DTs.

The Circular has provided much-needed clarity to the non-company issuers on the appointment of DT nominee. Earlier, these issuers were not obligated to appoint a nominee director of the DT to its Board. However, the Circular has now obligated even the non- company issuers to appoint directors nominated by DT. A nominee director essentially looks after the management of the entities and regulates the policies. Therefore, this present approach of mandatorily appointing a nominee director would be beneficial for the investors who have invested in such governing entities and would safeguard their rights and interests. SEBI has also enhanced the role of the DTs by entrusting them with compliance with the provisions of the circular.

1.https://www.sebi.gov.in/legal/circulars/jul-2023/appointment-of-director-nominated-by-the-debenture-trustee-on-boards-of-issuers_73439.html
2.Regulation 15(1)(e) of the SEBI (Debenture Trustee Regulations). 1999 (“DT Regulations”).