CS M. Kurthalanathan
Debentures- under Sec.71 of the Companies Act,2013 & Companies (Share Capital and Debentures) Rules, 2014
As per Sec.2(30) of the CA,2013,”Debenture” includes debenture stock, bonds or any other instrument of the company evidencing a debt, whether constituting a charge on the assets of the company or not.
A company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption, which shall be approved by a special resolution passed at a general meeting.
No company shall issue any debentures carrying any voting rights.
Conditions for issue of secured debentures:
The company shall not issue secured debentures, unless it complies with the following conditions, namely:-
1.Term of Debentures:
An issue of secured debentures may be made, provided the date of its redemption shall not exceed 10 years from the date of issue.
If a company engaged in the setting up of infrastructure projects may issue secured debentures for a period exceeding 10 years but not exceeding 30 years
2.Secured by charge:
An issue of debentures shall be secured by the creation of a charge, on the properties or assets of the company, having a value which is sufficient for the due repayment of the amount of debentures and interest thereon.
3.Appoint Debenture Trustee:
The company shall appoint a debenture trustee before the issue of prospectus or letter of offer for subscription of its debentures and not later than 60 days after the allotment of the debentures, execute a debenture trust deed to protect the interest of the debenture holders.
4.Charge/Mortgage in favour of Debenture Trustee:
The security for the debentures by way of a charge or mortgage shall be created in favour of the debenture trustee on-
(i) any specific movable property of the company (not being in the nature of pledge); or
(ii) any specific immovable property wherever situate, or any interest therein.
Conditions for appointment of Debenture Trustees:
No company shall issue a prospectus or make an offer or invitation to the public or to its members exceeding 500 for the subscription of its debentures, unless the company has, before such issue or offer, appointed one or more debenture trustees
The company shall appoint debenture trustees after complying with the following conditions, namely:-
(a) the names of the debenture trustees shall be stated in letter of offer inviting subscription for debentures and also in all the subsequent notices or other communications sent to the debenture holders;
(b) before the appointment of debenture trustee or trustees, a written consent shall be obtained from such debenture trustee or trustees proposed to be appointed and a statement to that effect shall appear in the letter of offer issued for inviting the subscription of the debentures;
(c) A person shall not be appointed as a debenture trustee, if he-
(i) beneficially holds shares in the company;
(ii) is a promoter, director or KMP or any other officer or an employee of the company or its holding, subsidiary or associate company;
(iii) is beneficially entitled to moneys which are to be paid by the company otherwise than as remuneration payable to the debenture trustee;
(iv) is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company;
(v) has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon;
(vi) has any pecuniary relationship with the company amounting to 2% or more of its gross turnover or total income or Rs.50 Lakhs or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;
(vii) is relative of any promoter or any person who is in the employment of the company as a director or KMP.
(d) the Board may fill any casual vacancy in the office of the trustee but while any such vacancy continues, the remaining trustee or trustees, if any, may act
If such vacancy is caused by the resignation of the debenture trustee, the vacancy shall only be filled with the written consent of the majority of the debenture holders.
(e) any debenture trustee may be removed from office before the expiry of his term only if it is approved by the holders of not less 3/4th in value of the debentures outstanding, at their meeting.
Duties of Debenture Trustee:
It shall be the duty of every debenture trustee to-
(a) satisfy himself that the letter of offer does not contain any matter which is inconsistent with the terms of the issue of debentures or with the trust deed;
(b) satisfy himself that the covenants in the trust deed are not prejudicial to the interest of the debenture holders;
(c) call for periodical status or performance reports from the company;
(d) communicate promptly to the debenture holders defaults, if any, with regard to payment of interest or redemption of debentures and action taken by the trustee therefor;
(e) appoint a nominee director on the Board of the company in the event of-
(i) 2 consecutive defaults in payment of interest to the debenture holders;
(ii) default in creation of security for debentures; or
(iii) default in redemption of debentures
(f) ensure that the company does not commit any breach of the terms of issue of debentures or covenants of the trust deed and take such reasonable steps as may be necessary to remedy any such breach;
(g) inform the debenture holders immediately of any breach of the terms of issue of debentures or covenants of the trust deed;
(h) ensure the implementation of the conditions regarding creation of security for the debentures, if any, and debenture redemption reserve;
(i) ensure that the assets of the company issuing debentures and of the guarantors, if any, are sufficient to discharge the interest and principal amount at all times and that such assets are free from any other encumbrances except those which are specifically agreed to by the debenture holders;
(j) do such acts as are necessary in the event the security becomes enforceable;
(k) call for reports on the utilization of funds raised by the issue of debentures-
(l) take steps to convene a meeting of the holders of debentures as and when such meeting is required to be held;
(m) ensure that the debentures have been converted or redeemed in accordance with the terms of the issue of debentures;
(n) perform such acts as are necessary for the protection of the interest of the debenture holders and do all other acts as are necessary in order to resolve the grievances of the debenture holders.
Convening Meeting of Debenture holders by Debenture Trustee :
The meeting of all the debenture holders shall be convened by the debenture trustee on-
(a) requisition in writing signed by debenture holders holding at least 1/10th in value of the debentures for the time being outstanding;
(b) the happening of any event, which constitutes a breach, default or which in the opinion of the debenture trustees affects the interest of the debenture holders
Liability of Debenture Trustee:
Any provision contained in a trust deed for securing the issue of debentures, or in any contract with the debenture-holders secured by a trust deed, shall be void in so far as it would have the effect of exempting a trustee thereof from, or indemnifying him against, any liability for breach of trust, where he fails to show the degree of care and due diligence required of him as a trustee, having regard to the provisions of the trust deed conferring on him any power, authority or discretion.
The liability of the debenture trustee shall be subject to such exemptions as may be agreed upon by a majority of debenture-holders holding not less than 3/4th in value of the total debentures at a meeting held for the purpose.
Creation of Debenture Redemption Reserve A/c:
The company shall create a Debenture Redemption Reserve for the purpose of redemption of debentures, in accordance with the conditions given below;
(a) the Debenture Redemption Reserve shall be created out of the profits of the company available for payment of dividend;
(b) the company shall create Debenture Redemption Reserve equivalent to at least 50% of the amount raised through the debenture issue before debenture redemption commences
(c) every company required to create Debenture Redemption Reserve shall on or before the 30th day of April in each year, 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 31st day of March of the next year, in any one or more of the following methods, namely:-
(i) in deposits with any scheduled bank, free from any charge or lien;
(ii) in unencumbered securities of the CG or of any SG;
(iii) in unencumbered securities mentioned in sub-clauses (a) to (d) and (ee) of section 20 of the Indian Trusts Act, 1882;
(iv) in unencumbered bonds issued by any other company which is notified under sub-clause (f) of section 20 of the Indian Trusts Act, 1882;
(v) the amount invested or deposited as above shall not be used for any purpose other than for redemption of debentures maturing during the year referred above:
The amount remaining invested or deposited, as the case may be, shall not at any time fall below 15% of the amount of the debentures maturing during the year ending on the 31st day of March of that year.
(d) in case of partly convertible debentures, Debenture Redemption Reserve shall be created in respect of non-convertible portion of debenture issue in accordance with this sub-rule.
(e) the amount credited to the Debenture Redemption Reserve shall not be utilised by the company except for the purpose of redemption of debentures.
Contract enforce by Decree:
A contract with the company to take up and pay for any debentures of the company may be enforced by a decree for specific performance.
Redemption of Debentures:
A company shall pay interest and redeem the debentures in accordance with the terms and conditions of their issue.
Debenture Trustee file petition before Tribunal:
The debenture trustee may file a petition before the Tribunal-
If any time the debenture trustee comes to a conclusion that the assets of the company are insufficient or are likely to become insufficient to discharge the principal amount as and when it becomes due.
Order by Tribunal:
The Tribunal may, after hearing the company and any other person interested in the matter, by order, impose such restrictions on the incurring of any further liabilities by the company as the Tribunal may consider necessary in the interests of the debenture-holders.
The Tribunal may, on the application of any or all of the debenture-holders, or debenture trustee and, after hearing the parties concerned, direct, by order, the company to redeem the debentures forthwith on payment of principal and interest due thereon–
If a company fails to redeem the debentures on the date of their maturity or fails to pay interest on the debentures when it is due.
Inspection of Trust Deed:
A trust deed for securing any issue of debentures shall be open for inspection to any member or debenture holder of the company, in the same manner, to the same extent and on the payment of the same fees, as if it were the register of members of the company.
Copies of Trust Deed:
A copy of the trust deed shall be forwarded to any member or debenture holder of the company, at his request, within 7 days of the making thereof, on payment of fee
Debenture – CA,2013 Vs CA,1956:
|1||A company may issue debentures either with an option to convert such debentures into shares wholly or partly at the time of redemption. The issue of such debentures shall be approved by a special resolution passed at a general meeting.||There was no requirement for special resolution for issuing optionally convertible debentures into shares.|
|2||Secured Debentures may be issued by a company subject to the terms and conditions specified by Companies (Share Capital and Debentures) Rules, 2014||There was no requirement to comply with the prescribed termed and conditions to issue secured debentures.|
|3||Appointment of debenture trustees is compulsory only when the prospectus is issued to more than 500 persons for subscription of debentures.||Appointment of debenture trustee is compulsory in every public offer of debentures regardless of the number of persons to whom the offer is made.|
|4||The debenture trustee is required to file petition to the tribunal ,if he came to a conclusion that the assets of the company are insufficient or are likely to become insufficient to discharge the principal amount as and when it becomes due.||The debenture trustee was required to apply to CLB where he came to a conclusion that the assets of the company are insufficient or are likely to become insufficient to discharge the principal amount as and when it becomes due.|
If any default is made in complying with the order of the Tribunal under this section-
|Officer of the Company|| Imprisonment for a term which may extend to 3 years orFine which shall not be less than Rs.2,00,000/- but which may extend to Rs.5,00,000/- or
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Though utmost efforts has made to provide authentic information, it is suggested that to have better understanding kindly cross-check the relevant sections, rules under the Companies Act,2013.