Skip to content

Strategic Management and Corporate Finance · Role of Intermediaries in Fund Raising

Debenture Trustees and Credit Rating Agencies Explained

Updated 11 October 2026 · Fact-checked

A debenture trustee is a SEBI-registered intermediary that protects debenture holders by holding security, monitoring the issuer and enforcing rights on default. A credit rating agency is a SEBI-registered body that gives an independent opinion on the issuer's ability to repay debt. Both are needed in debt fundraising.

Understand Debenture Trustees and Credit Rating Agencies

When a company issues debentures to the public, thousands of investors lend money. They cannot individually watch the company or enforce the security. So the law puts a debenture trustee between the company and the investors. The trustee acts for the debenture holders as a group.

Under the Companies Act, 2013, a company issuing debentures with a maturity of more than 18 months must appoint a debenture trustee, and the trust deed must be executed within the time the rules allow. For listed non-convertible debt, SEBI's debt securities regulations also require the trustee to be appointed before the issue opens. Only a trustee registered under the SEBI (Debenture Trustees) Regulations, 1993 can act for a public or listed issue. Check the exact thresholds and timelines in the study material and quote them as given there.

The trustee's main work is to: hold or oversee the security and its charge, check that the asset cover is maintained, monitor end-use of funds and compliance with the trust deed, call meetings of holders, and act on default. The trustee must act in the interest of holders, not the issuer. A clause that exempts a trustee from liability for negligence is not valid.

A credit rating agency (CRA) gives a rating, which is an opinion on the likelihood of timely payment of interest and principal. CRAs are registered and regulated under the SEBI (Credit Rating Agencies) Regulations, 1999. A rating helps investors compare risk and helps the issuer price the debt. For public and listed debt, rating from a registered CRA is mandatory under SEBI's debt rules.

The two roles are different. The trustee protects holders after the money is raised. The CRA informs investors before and during the life of the debt. Exam answers should keep this contrast clear.

Key rules to remember

Trustee for debentures
Maturity > 18 months → debenture trustee must be appointed (Companies Act, 2013)
Also state that the trustee must be registered with SEBI for public or listed issues. Quote the rule number from your study material.
Governing regulations
Trustees: SEBI (Debenture Trustees) Regulations, 1993 | CRAs: SEBI (Credit Rating Agencies) Regulations, 1999
Name the correct regulation with the correct intermediary. Mixing them loses marks.
Trustee's core duties
Security + Monitoring + Holder meetings + Enforcement on default
Use this four-part frame to structure any duties answer.
Rating requirement
Public or listed debt → rating from a SEBI-registered CRA
Disclose the rating and its rationale in the offer document.
Trust deed
Trust deed = terms, security, trustee powers, holder rights
It is the key document between issuer and trustee. Trustee cannot be excused from liability for negligence.

How to solve Debenture Trustees and Credit Rating Agencies questions

Use this method for any question on debenture trustees or rating agencies, whether theory or case-based.

  1. 1Identify which intermediary the question is about: trustee, CRA or both.
  2. 2Name the governing law: Companies Act, 2013 and the relevant SEBI regulations.
  3. 3State the rule that applies: appointment, eligibility, duties or registration.
  4. 4Apply it to the facts: issue type, tenure, listed or unlisted, security offered.
  5. 5Check for breaches, such as no trustee, no rating, conflict of interest or missing trust deed.
  6. 6Conclude with the consequence or action the company or trustee must take.
  7. 7Add a practical point: trust deed, disclosure in the offer document, reporting to SEBI or the stock exchange.

Quickest way: Role-Rule-Result in three lines

When to use it: Use for short-note questions or when time is short in a 3-hour paper.

  1. Write one line defining the intermediary and its governing regulations.
  2. List four to five duties or functions in bullets.
  3. Close with one line on why the role protects investors, and one compliance point.

Common mistakes in Debenture Trustees and Credit Rating Agencies

  • Saying any person can act as a debenture trustee.

    Students remember the Companies Act appointment rule but forget SEBI registration.

    Fix: State that a trustee must be a SEBI-registered entity, and that the SEBI regulations set eligibility.

  • Confusing the trustee's role with the rating agency's role.

    Both are called intermediaries protecting investors.

    Fix: Trustee = protects holders and enforces security. CRA = gives an opinion on credit risk.

  • Treating a rating as a guarantee of repayment.

    Students read high rating as safe.

    Fix: Write that a rating is an opinion on risk, not a recommendation to buy or a guarantee.

  • Citing the wrong regulation year or name.

    Several SEBI regulations on debt sound alike.

    Fix: Memorise: Debenture Trustees 1993, Credit Rating Agencies 1999.

  • Writing duties without applying them to the facts.

    Students learn lists and stop there.

    Fix: After each duty, link it to the case, for example failure to maintain asset cover means the trustee must act.

  • Forgetting that exemption clauses for trustee negligence are not valid.

    This point is in the Act and is often skipped.

    Fix: Add it whenever the trust deed is discussed.

Worked examples

Example 1

Sundaram Power Ltd proposes a public issue of secured non-convertible debentures of ₹200 crore maturing in five years. The directors ask whether they need a debenture trustee and a credit rating. Advise.

Show the solution
  1. Provision: a company issuing debentures with maturity above 18 months must appoint a debenture trustee under the Companies Act, 2013. For a public or listed issue, the trustee must be SEBI-registered.
  2. Facts: the debentures mature in five years, which is above 18 months. The issue is public and secured.
  3. Application: a debenture trustee is required. The trust deed must be executed within the prescribed time and the security created in favour of the trustee.
  4. Rating: as it is a public issue of debt securities, the company must obtain a rating from a SEBI-registered credit rating agency and disclose it in the offer document.
  5. Practical points: appoint the trustee before the issue opens, state its name in the offer document, and give the trustee consent.

Answer: Yes. Sundaram Power Ltd must appoint a SEBI-registered debenture trustee and obtain a rating from a SEBI-registered CRA before the public issue.

Example 2

Explain the duties of a debenture trustee towards debenture holders when the issuer defaults on interest payment.

Show the solution
  1. Provision: the trustee acts for holders under the trust deed and SEBI (Debenture Trustees) Regulations, 1993.
  2. Verify: the trustee should check the default, the reason given and the status of the security and asset cover.
  3. Inform: it should communicate the default to the holders and, where required, to the stock exchange and SEBI.
  4. Meet: it should call a meeting of holders to take their directions on the next step.
  5. Enforce: where holders so decide or the deed requires, it should enforce the security and recover dues for holders.
  6. Conclusion: the trustee must act in the interest of holders, not the issuer, and cannot be exempted from liability for negligence.

Answer: On default, the trustee must verify, inform, convene holders, and enforce the security as the trust deed and holders' directions allow, always in holders' interest.

Exam tips

  • Expect case-style questions asking whether a trustee or rating is mandatory. Always state the tenure, public or listed status, and then conclude.
  • For duties questions, use the frame Security, Monitoring, Meetings, Enforcement, and give the regulation name.
  • Keep a one-line distinction between trustee and CRA ready; it is a common short-note point.
  • Check the study material for current SEBI timelines and thresholds, and quote them only as given there.
  • Finish with a practical drafting or compliance point, such as the trust deed or offer document disclosure.

Practice questions from Role of Intermediaries in Fund Raising

Debenture Trustees and Credit Rating Agencies in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Debenture Trustees and Credit Rating Agencies: frequently asked questions

Who can act as a debenture trustee?

Only an entity registered with SEBI under the SEBI (Debenture Trustees) Regulations, 1993 can act for public or listed issues. Eligible categories include scheduled banks, public financial institutions, insurance companies and certain corporate bodies. Confirm the exact list in your study material.

What does a credit rating agency do in fund raising?

It gives an independent opinion on the issuer's ability to pay interest and principal on time. Investors use it to judge risk, and issuers use it to price debt. It is not a guarantee of repayment.

Which SEBI regulations govern credit rating agencies?

The SEBI (Credit Rating Agencies) Regulations, 1999 govern registration, conduct and obligations of rating agencies. They also cover how ratings must be disclosed and monitored.

Is a debenture trustee needed for every debenture issue?

No. The Companies Act, 2013 requires one where debentures mature after more than 18 months. Check the rules for any exceptions in your study material.