All about debentures and issue process

As per section 2(30) of Companies Act, 2013, Debentures includes Debentures Stocks, Bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the Company or not provided that

(a) The instrument referred to in chapter III-D of RBI act. 1934; and

(b) Such other instrument as may be prescribed by the Central Government in consultation with the RBI, issues by a Company, shall not be treated as debentures

In simple terms, a debenture may be defined as an instrument acknowledging a debt by a Company to some person or persons

As per Section 71 of the Companies Act, 2013, a company can issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption.

Provided that the issue of debentures with an option to convert such debentures into shares shall be approved by a special resolution passed by the shareholders in a duly convened general meeting of the company.

FEATURES OF DEBENTURES

(As per section 23 of Companies Act, 2013, the provisions of the companies act regarding issue of shares to the public by prospectus would also Mutatis Mutandis apply to the issue of debentures by prospectus

TYPES OF DEBENTURES

REDEEMABLE DEBENTURES

They are issued on the terms that a company is bound to repay the amount of Debentures, either at fixed date, or upon demand, or after notice, or under a system of periodical drawings

CONVERTIBLE DEBENTURES

In these debentures an option is given to the Debentures holders to exchange a part or whole of their Debentures for shares in the Company under certain conditions and limitation imposed regarding the period during which the option may be exercised this enables investors to change the position from the Debentures holder to a Shareholders. when he finds that company is in a sound position finically and begins to make profit

SECURED AND UNSECURED/ NECKED DEBENTURES

Where debentures are secured by a Mortgage or a Charge on the property of the company, they are known as secured debentures. Where they are not secured by any Mortgage or Charge on any property of the company, they are said to be Naked or Unsecured

Secured debentures may be issued by a company subject to such terms and conditions as may be prescribed by Companies (Share Capital and Debentures) Rules 2014 and amendment thereof.

Further Company cannot issue any kind of debentures carrying any voting rights.

CONDITION FOR ISSUE SECURED DEBENTURE

Before issue of the secured debentures by the company they have to comply with the following conditions, namely:

(1) Redemption of Secured Debenture shall not exceed ten years from the date of issue. Provided following classes of companies may issue secured debentures for a period exceeding ten years but not exceeding thirty years,

(i) Companies engaged in setting up of infrastructure projects;

(ii) Infrastructure Finance Companies as defined in clause (viia) of sub direction (1) of direction 2 of Non-Banking Financial (Non deposit accepting or holding) Companies Prudential Norms (Reserve Bank) Directions, 2007;

(iii) Infrastructure Debt Fund Non-Banking Financial Companies

(iv) Companies permitted by a Ministry or Department of the Central Government or by Reserve Bank of India or by the National Housing Bank or by any other statutory authority to issue debentures for a period exceeding ten years.

(2) Issue of debentures shall be secured by the creation of a charge on the properties/assets of the company/ its subsidiaries/ its holding company/ its associates companies, having a value which is sufficient for the due repayment of the amount of debentures and interest thereon

(3) company shall appoint one or more debenture trustee before issue prospectus or make an offer or invitation to the public or to its members exceeding five hundred for the subscription of its debentures and execute trust deed within sixty days from the allotment of the debentures to protect the interest debenture holder;

(4) 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 31st day of March of next year.

CAN A PRIVATE COMPANY LIST ITS DEBENTURES?

Yes, a Private Company can issue bonds/debenture under the Companies Act 2013. There are regulations with respect to maintain asset cover, credit score rating, debenture redemption reserve, hold liquid assets for current maturities, etc.

A Private Company can do private placement and also listing the same in BSE or NSE under the debt segment after complying with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

PROCEDURE FOR ISSUE OF DEBENTURE ON PRIVATE PLACEMENT BASIS

Step 1: – Calling a Board Meeting and pass resolutions for Approval of the following:

• to issue debentures and decide its type whether secured or unsecured and terms & conditions thereof
• Offer letter for private placement in Form No. PAS – 4 and Application Forms/Debenture Subscription agreement
• Approval of Form No. PAS – 5 (record of a private placement offer)
• Written consent of a Debenture Trustee and appointment thereof (In case of secured debenture)
• Approval of Debenture Trustee Agreement (In case of secured debenture)
• To authorize for creation of charge on the assets of the company (In case of secured debenture)
• To fix day, date and time for the extraordinary general meeting of shareholders in case of increase in the Borrowing power of the Board of Director by passing Special Resolution in terms of Section 180(1)(c).
• Authorizing the Board of Directors to open a separate bank account for the proposed issue as per section 42.

Step 2:-Issuing notices to the shareholders for Extra-Ordinary General Meeting of the Company and that must contain an explanatory statement bearing the particulars of offer, date of passing board resolution, kinds of securities offered and its price, basis or justification for the price, name and address of valuer who performed valuation, amount which the company intends to raise, material terms of raising such securities, proposed time schedule, purpose or objects of offer, contribution being made by the promotes or directors.

Step 3:-Pass a Special Resolution in the Shareholders meeting for Private Placement of Debenture and For Increasing borrowing limit for issuance of Debenture.

Step 4:- Filing of e-form MGT-14 along with offer letter, Valuation Report and CTC of Special Resolution along with the explanatory statement appended with the Notice of the EGM.

Step-5:- Send Offer Letters in form PAS-4 to identified persons within 30 days of recording the names of the identified persons and value of the share will be as per the valuation report of a Registered Valuer as provided under Section 247 of Companies Act, 2013.

Step-6:- Open Separate Bank Account and receive application money within the offer period as per the offer letter.

Step 7: Hold Board meeting after closure of the offer period and pass Resolution for following

• Allotment of Debenture to the entitled subscribers.
• Issue of Debenture Certificate
• Debenture Deed (SH-12)
• Creation of DRR
• Creation of charge on asset if required

Step 8:- File e-form PAS-3 “Return of Allotment” within 15 days from passing Board Resolution for allotment.

Step 9:- Issuance of share certificate as per section 56(4) to the allottees within 6 months of allotment.

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