Introduction:
In the realm of corporate finance, debentures play a crucial role as a form of long-term borrowing for companies. Companies issue debentures to raise capital, and in return, investors holding these debentures receive fixed interest payments and the principal amount at maturity. However, the life cycle of debentures involves a critical phase known as redemption, where the company repays the principal amount to the debenture holders.
This article, explores the nuances of debenture redemption as defined by the Companies Act 2013 and the Companies (Amendment) Act 2020. We will delve into the various sources and methods of redeeming debentures, dissect the relevant sections of the Companies Act, and decipher the rules stipulated by the Companies (Share Capital and Debentures) Rules, 2014.
Methods of Redeeming Debentures
1. Redemption by Lump-Sum Payment: This method involves repaying the entire principal amount along with accrued interest in a single lump-sum payment on the specified redemption date.
2. Redemption by Annual Instalment Payment: Companies may opt for a phased approach, repaying debentures in annual instalments. Each instalment comprises a portion of the principal along with accrued interest.
3. Redemption by Sinking Fund Method: The sinking fund method involves setting aside regular contributions to a sinking fund, which is then used to redeem debentures at maturity. This method ensures a systematic approach to repayment.
4. Redemption by Insurance Policy Method: In this method, the company takes out an insurance policy, and the maturity amount from the policy is utilized for debenture redemption. It adds a layer of financial security to the redemption process.
5. Redemption by Purchase of Own Debentures in Open Market: Companies can repurchase their own debentures from the open market, providing liquidity to existing debenture holders and facilitating redemption.
6. Redemption by Conversion into New Shares or Debentures: Conversion offers an alternative to cash redemption. Debentures are converted into new shares or debentures, aligning with the company’s capital structure.
When the company try to redeem debentures by resorting to any of the above methods after utilizing any one of the sources indicated above, it will take into consideration the following points.
Companies Act 2013.
Sec 71(1) A Company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption.
Sec 71(4) Where debentures are issued by a company under this Section, the company shall create a debenture redemption reserve account out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilized by the company except for the redemption of debentures.
Companies (Share Capital and Debentures) Rules, 2014.
Rule 18(1).
The company shall not issue secured debentures, unless it complies with the following conditions, namely:-
a .An issue of secured debentures may be made, provided the date of its redemption shall not exceed ten years from the date of issue :
(Provided that the certain classes of companies may issue secured debentures for a period exceeding ten years but not exceeding thirty years)
Rule 18(7).
The company shall comply with the requirements with regard to Debenture Redemption Reserve (DRR) and investment or deposit of sum in respect of debentures maturing during the year ending on the 31 st day of March of next year, in accordance with the conditions given below:-
a. Debenture Redemption Reserve shall be created out of profits of the company available for payment of dividend,
b. the limits with respect to adequacy of Debenture Redemption Reserve and investment or deposits, as the case may be, shall be as under:-
i. Debenture Redemption Reserve is not required for debentures issued by All India Financial Institutions regulated by Reserve Bank of India and Banking Companies for both public as well as privately placed debentures.
ii. For other Financial Institutions within the meaning of clause (72) of section 2 of the Companies Act,2013,Debenture Redemption Reserve shall be as applicable to Non-Banking Finance Companies registered with RBI.
iii. For listed companies (other than All India Financial Institutions and Banking Companies As specified in sub-clause (i)), Debenture Redemption Reserve is not required in the Following cases –
(A) in case of public issue of debentures-
A. for NBFCs registered with RBI under section45-IA of the RBI Act,1934 and for Housing Finance Companies registered with National Housing Bank;
B. For other listed companies.
(B) In case of privately placed debentures, for companies specified in sub items A and B.
iv. For unlisted companies ((other than All India Financial Institutions and Banking Companies as specified in sub-clause (i)),-
A. For NBFCs registered with RBI under section45-IA of the RBI Act,1934 and for Housing Finance Companies registered with National Housing Bank; Debenture Redemption Reserve is not required in case of privately placed debentures,
B. For other unlisted companies, the adequacy of Debenture Redemption Reserve sall be ten percent of the value of the outstanding debentures.
v. In case a company is covered in item (A) of sub-clause (iii) of clause (b) or item (B) of sub-clause (iv) of clause (b),it shall on or before the 30 th day of April in each year, in respect of debentures issued by such a company, invest or deposit, as the case may be, a sum which shall not be less than 15%, of the amount of its debentures maturing during the year ending on the 31 st day of March of the next year, in any one or more methods of investments or deposits as provided in sub-clause (vi):
Provided that the amount remaining invested or deposited, as the case may be, shall not any time fall below fifteen percent of the amount of the debentures maturing during the year ending on 31 st day of March of that year
vi. For the purpose of sub-clause (v), the methods of deposits or investments, as the case may be, are as follows-
(A) In deposits with any scheduled bank, free from any charge or lien;
(B) In unencumbered securities of the central Government or of any state Government.
(C) In unencumbered securities mentioned in sub-clauses (a) to (d) and (ee) of section 20 of Indian Trusts Act 1882.
(D) In unencumbered bonds issued by any other company which is notified under sub- clause (f) Of section 20 of Indian Trusts Act, 1882.
Conclusion: Article provides a detailed guide on navigating the intricacies of debenture redemption under the Companies Act 2013 and subsequent amendments. Gain insights into the rules, conditions, and methods governing this crucial aspect of corporate finance. Stay informed to ensure compliance and strategic decision-making in your financial endeavors.
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