Debenture trustee conflict of interest rules
Debenture trustee conflict of interest is not an edge case in the model, it is the model. The trustee that monitors an issuer on behalf of bondholders is appointed and paid by that issuer. SEBI does not pretend the conflict away, it regulates it: policies, information barriers, dealing restrictions, disclosure, and a half yearly certification that the trustee's other businesses do not cut across the trusteeship. This guide covers all four layers. It is not investment advice.
Definition
Conflict of interest for a debenture trustee
arises because the trustee is appointed and paid by the issuer whose compliance it monitors on behalf of debenture holders. Chapter XVI of SEBI's Master Circular for Debenture Trustees requires policies to identify and avoid or manage such conflicts, and Schedule III of the DT Regulations requires the trustee to avoid conflict and disclose its interest. Source: SEBI.
What does the Code of Conduct require?
Avoidance and disclosure, in three separate paragraphs. Regulation 16 of the SEBI (Debenture Trustees) Regulations, 1993 requires every debenture trustee to abide by the Code of Conduct in Schedule III. Three of its paragraphs go to conflict:
- Paragraph 7 requires the trustee to avoid conflict of interest and make adequate disclosure of its interest
- Paragraph 9 requires a mechanism to resolve any conflict of interest situation that may arise in the conduct of its business, and where one arises, reasonable steps to resolve it in an equitable manner
- Paragraph 10 requires appropriate disclosure to the client of possible sources or potential areas of conflict of duties and interest while acting as debenture trustee, which would impair its ability to render fair, objective and unbiased service
The rest of Schedule III sets the surrounding standard: protect the interest of debenture holders, maintain high standards of integrity, dignity and fairness, fulfil obligations promptly and professionally, and exercise due diligence, proper care and independent professional judgment.
What do the SEBI conflict guidelines add?
Twelve specific obligations, drawn from an international standard. Chapter XVI of SEBI's Master Circular for Debenture Trustees, SEBI/HO/DDHS-PoD-1/P/CIR/2025/117 dated August 13, 2025, states that the guidelines follow Principle 8 of the International Organisation of Securities Commissions Objectives and Principles of Securities Regulations, and cover the trustee and its associated persons, as defined in the SEBI (Certification of Associated Persons in the Securities Markets) Regulations, 2007.
Paragraph 4 requires the debenture trustee and its associated persons to:
| Obligation | Paragraph |
|---|---|
| Lay down policies and internal procedures with active senior management involvement to identify and avoid, deal with or manage actual or potential conflicts, develop an internal code of conduct, and communicate them to all concerned | 4.1 |
| Maintain high standards of integrity in the conduct of business at all times | 4.2 |
| Ensure fair treatment of clients and not discriminate among them | 4.3 |
| Ensure personal interest never conflicts with duty to clients, with the client's interest always taking primacy | 4.4 |
| Disclose to clients possible sources or potential areas of conflict that would impair fair, objective and unbiased service | 4.5 |
| Reduce opportunities for conflict through prescriptive measures such as information barriers between departments or units | 4.6 |
| Place restrictions on transactions in securities while handling an issuer or client mandate in that security | 4.7 |
| Not deal in securities while in possession of material non-published information | 4.8 |
| Not communicate material non-published information while dealing in securities on behalf of others | 4.9 |
| Not contribute in any way to manipulating demand or supply, or influencing prices of securities | 4.10 |
| Not have an incentive structure that encourages sale of products not suiting the client's risk profile | 4.11 |
| Not share information received from or pertaining to clients for personal interest | 4.12 |
Paragraph 2 puts the education obligation on the trustee itself: it is responsible for educating its associated persons on compliance with these guidelines. Paragraph 5 requires the trustee's board to put systems in place for implementation and to provide guidance enabling identification, elimination or management of conflict situations. Paragraph 6 states the guidelines are in addition to anything in the respective regulations or circulars.
How is compliance actually tested?
By a signed certificate every six months, and the conflict question is the first item on it. Chapter XIII requires the debenture trustee to furnish a half yearly compliance report to SEBI in the format at Annex-XIIIA, along with details of other activities it carries out, within 75 days of the end of each half-year, plus a Risk-Based Supervision report.
Section (a) of Annex-XIIIA is headed "No conflict of interests with other activities" and requires the trustee to certify that the activities other than debenture trusteeship it performs are not in conflict with debenture trustee activities, and that appropriate systems and policies have been put in place to protect the interests of debenture holders.
Half yearly, within 75 days
Frequency and deadline for a debenture trustee's compliance report to SEBI, whose first certification item is the absence of conflict with its other activities
Source: SEBI Master Circular for Debenture Trustees, SEBI/HO/DDHS-PoD-1/P/CIR/2025/117, Chapter XIII and Annex-XIIIA, dated August 13, 2025
Paragraph 2 of Chapter XIII adds a governance step that makes the certification harder to treat as routine: the half yearly compliance report shall be reviewed by the board of directors of the debenture trustee prior to submission to SEBI. The format itself requires the date of that board review and the board's observations on any deficiencies and non-compliances, along with the corrective measures initiated.
Why did the 2025 amendment make this more important?
Because it widened the range of other businesses a trustee may run. Regulation 9C of the SEBI (Debenture Trustees) Regulations, 1993, effective October 27, 2025, permits a debenture trustee to also undertake activities under another financial sector regulator's purview, and unregulated activities that are fee-based, non-fund based and in the financial services sector.
The conditions attached to that permission are themselves conflict controls. Those activities must be on an arms-length basis, through separate business units, and Regulation 9C(2) requires the net worth specified under the regulations to be ring-fenced from any adverse impact arising from them. A trustee also regulated by the Reserve Bank of India must carry out the debenture trustee activity through a separate business unit.
The same logic runs through outsourcing. Paragraph 2.2 of Annex-XIVA permits a group entity or associate to act as an outsourcing third party, but requires arm's length distance in infrastructure, manpower, decision-making and record keeping for avoidance of potential conflicts, with disclosure in the contract and risk management practices identical to those used for an unrelated party.
Where can an investor see the fee side of the relationship?
On the trustee's own website. Chapter VII requires a debenture trustee to publish its minimum fee, stated either as an absolute amount or as a percentage of issue size. That disclosure is what lets a holder see the commercial relationship that the conflict rules are managing, rather than inferring it.
Related reading
The other businesses that create the conflict surface are covered in what activities can a debenture trustee undertake, and the third party version of the same question is in can a debenture trustee outsource its work. The obligations the trustee owes holders are listed in duties of a debenture trustee, what it must publish is in what must a debenture trustee disclose on its website, and the route for raising a problem is in how to complain to a debenture trustee.
Debenture trustee conflict of interest is a structural feature that SEBI manages through policies, barriers, restrictions and a board reviewed half yearly certification. Flock reports what issuers and trustees disclose, with the source and the date attached. It is not investment advice.
Frequently asked questions
What are the conflict of interest rules for debenture trustees?
Chapter XVI of SEBI's Master Circular for Debenture Trustees dated August 13, 2025 requires the trustee and its associated persons to lay down policies to identify and avoid or manage conflicts, maintain high standards of integrity, treat clients fairly, disclose potential conflicts, and use information barriers. The guidelines follow Principle 8 of the IOSCO Objectives and Principles. Source: SEBI.
Is a debenture trustee paid by the issuer it monitors?
Yes, which is the structural conflict the rules address. Chapter VII of SEBI's Master Circular for Debenture Trustees requires a trustee to publish its own minimum fee on its website, as an absolute amount or a percentage of issue size, and Chapter XVI requires policies to identify and manage conflicts of interest. Source: SEBI.
How is conflict of interest compliance verified?
Through a half yearly certificate. Section (a) of Annex-XIIIA of SEBI's Master Circular for Debenture Trustees requires the trustee to certify that activities other than debenture trusteeship are not in conflict with debenture trustee activities and that appropriate systems and policies protect debenture holders' interests. The board reviews the report before submission to SEBI. Source: SEBI.
Can a debenture trustee trade in a client issuer's securities?
It must place restrictions on doing so. Paragraph 4.7 of Chapter XVI requires appropriate restrictions on transactions in securities while handling a mandate of an issuer or client in respect of such security, and paragraph 4.8 bars dealing in securities while in possession of material non-published information. Source: SEBI.
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