How does a debenture trustee do due diligence?

Debenture trustee due diligence is the step that decides whether a bond marketed as secured is treated as secured at all. SEBI does not let the trustee accept the issuer's word on the assets, and it does not let the issuer pick or pay the professionals who check them. This guide covers the documents an issuer must provide, the registries a trustee must search, the freshness limits on guarantor financials, and the registration deadline that turns a paperwork failure into a covenant breach. It is not investment advice.

What is a debenture trustee's due diligence obligation?

Two provisions of the SEBI (Debenture Trustees) Regulations, 1993 sit behind it. Regulation 15(6) requires the trustee to exercise independent due diligence to ensure the security is free from encumbrances and that adequate consent has been taken from existing charge holders where there is any. Regulation 15(1)(i) places the broader obligation of ensuring the issuer's assets are sufficient to discharge the interest and principal amount on the debt securities at all times.

Chapter II of SEBI's Master Circular for Debenture Trustees, SEBI/HO/DDHS-PoD-1/P/CIR/2025/117 dated August 13, 2025, is the operating manual. Appointment itself runs through Regulations 13 and 13A of the DT Regulations.

What must the issuer hand over?

At the time of entering into the debenture trustee agreement, the issuer provides the documents that make verification possible. For the assets on which charge is proposed, that means title deeds, either originals or certified true copies by the issuer or by existing charge holders as available, or title reports issued by legal counsel or advocates, plus copies of the relevant agreements or memoranda of understanding and evidence of registration with the sub registrar, the Registrar of Companies and CERSAI.

From there the requirement splits on whether the asset is already encumbered.

Guarantees carry their own document set, and the two kinds are not treated alike.

For a personal guarantee, the issuer provides the guarantor's relationship with the issuer, a net worth statement certified by a chartered accountant and not older than six months from the date of the debenture trustee agreement, a list of the guarantor's assets with the same undertakings and consents as above, the conditions of invocation including any put options or other terms that may affect the security, and a list of previously entered guarantee agreements with an undertaking that there are no others.

For a corporate guarantee, the list is longer. It adds audited financial statements of the guarantor, again not older than six months from the debenture trustee agreement date, including details of all contingent liabilities. It adds the impact on the security if the guarantor restructures. It adds a board resolution of the guarantor for the guarantee. And it adds an undertaking by the guarantor that the guarantee shall be disclosed as a contingent liability in the notes to accounts forming part of its financial statements, which is what makes the exposure visible to that guarantor's own stakeholders.

Other credit enhancements are held to a continuing standard rather than a document list. Any other contractual comfort or credit enhancement provided for or on behalf of the issuer must be legal, valid and enforceable at all times, as affirmed by the issuer.

Where securities such as equity shares are offered as security, the trustee ensures a holding statement from the depository participant along with due pledge of those securities in its favour in the depository system. Any other form of security, such as a debt service reserve account, is disclosed with its details.

Who actually performs the checks, and who pays them?

The trustee, either itself or through professionals it appoints and pays. Paragraph 2.2.2 lists the professionals as a practicing chartered accountant, practicing company secretary, registered valuer or legal counsel, and specifies that they are appointed and compensated or remunerated by the debenture trustee. The terms on exercising due diligence also go into the debenture trustee agreement.

That allocation is the independence mechanism. A valuation or title opinion commissioned and paid for by the issuer whose assets are being valued would not carry the same weight, which is why the circular puts the engagement on the trustee's side of the table.

Which registries get searched?

Under paragraph 2.2.2(a)(i), the trustee verifies from the ROC, sub registrar, CERSAI, an information utility or other sources where the charge is registered or disclosed as per terms.

Conditional consents get an extra two step treatment under paragraph 2.2.2(a)(ii). The trustee verifies whether the conditional consent or permission given to the issuer by existing charge holders is valid as per the terms of the transaction documents. Then it intimates those existing charge holders through necessary and appropriate means, including by email, about the proposal to create a further charge, seeking their comments or objections to be communicated to the trustee within the next five working days.

For guarantees, paragraph 2.2.2(b) sends the trustee to a different set of sources: filings on the websites of the Ministry of Corporate Affairs, the stock exchanges, CIBIL and an information utility, plus an appraisal report and the necessary financial certificates from professionals.

The trustee then prepares one or more reports, which may include a valuation report, ROC search report, title search report or appraisal report and a security cover certificate, and independently assesses that the assets are adequate for the proposed issue.

What is an encumbrance for this purpose?

Broadly defined, and deliberately so. Paragraph 2.4.2 treats encumbrance as covering pledge, hypothecation, mortgage, lien, negative lien, and non disposal undertakings or agreements. It also covers any restriction on the free and marketable title to the asset, by whatever name called, whether executed directly or indirectly. And it covers any covenant, transaction, condition or arrangement in the nature of an encumbrance, again by whatever name called and whether direct or indirect.

Creating an encumbrance on securities for listed debt must go through the depository system only, in accordance with the Depositories Act, 1996, the SEBI (Depositories and Participants) Regulations, 2018, depository bye laws and other applicable regulations and circulars.

What must the offer document say?

Paragraph 2.5.1 requires three disclosures in the offer document or placement memorandum, over and above Schedule I of the NCS Regulations. The first is a statement that debt securities shall be considered as secured only if the charged asset is registered with the sub registrar and Registrar of Companies or CERSAI or depository as applicable, or is independently verifiable by the debenture trustee. The second is the terms and conditions of the debenture trustee agreement, including the fees charged by the trustee, the details of security to be created, and the process of due diligence carried out. The third is the due diligence certificate in the Annex IIA format.

That first disclosure is worth reading twice, because it makes registration or independent verifiability the test for whether the word secured applies.

The 30 day registration deadline

Before applying for listing, the issuer creates the charge specified in the offer document in favour of the debenture trustee and executes the debenture trust deed. Registration then runs on a clock.

Paragraph 2.6.3 requires the charge created by the issuer to be registered with the sub registrar, Registrar of Companies, CERSAI or depository as applicable within 30 days of creation. If the charge is not registered anywhere, or is not independently verifiable, the paragraph states that shall be considered a breach of covenants or terms of the issue by the issuer. An administrative lapse becomes a covenant event.

Records of the due diligence exercised are kept for five years from redemption of the debt securities, unless a law, enquiry or proceeding requires them to be retained longer.

Related reading

The two certificates this process produces, and the different gates they open, are separated in what is a due diligence certificate for debt securities. The platform on which these reports and charge details get recorded and validated is described in what is the Security and Covenant Monitoring System. Once the issue is live, the same trustee moves to continuous monitoring, covered in debenture trustee reporting deadlines and what is a security cover certificate.

Debenture trustee due diligence is a verification process with defined sources and deadlines, not an opinion on an issuer's creditworthiness. Flock reports what issuers and trustees disclose, with the source and the date attached. It is not investment advice.