Debenture: The word ‘debenture’ has been derived from a Latin word ‘debere’ which means to borrow. Debenture is a written instrument acknowledging a debt to the Company. It contains a contract for repayment of principal after a specified period or at intervals or at the option of the company and for payment of interest at a fixed rate payable usually either half-yearly or yearly on fixed dates.
Debenture includes debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of a company or not as defined in the Companies Act. This is an inclusive definition and amounts to borrowing of monies from the holders of debentures on such terms and conditions subject to which the debentures have been issued.
This is an inclusive definition and amounts to borrowing of monies from the holders of debentures on such terms and conditions subject to which the debentures have been issued. Basically it is a document or certificate signed by the authorized officers of a company acknowledging money lent and guaranteeing repayment with interest and creating security on the assets of the company for due performance of its obligation.
A debenture means a document, which creates or acknowledges a debt. [Levy vAbercorries State Co. (1887) 37 Ch D 260]
*(d) to borrow monies;
“Any amount raised by the issue of debentures secured by a first charge or a charge ranking paripassu with the first charge on any assets referred 73 Proviso to in Schedule III of the Act excluding intangible assets of the company or debentures compulsorily convertible into shares of the company within five years.”
PURPOSE OF FILING OF FORMS:
Special Resolution:A Special resolution is required to be passed at a General Meeting of the Company for following purposes:
First Board Resolution:Board resolution is required to be Pass for following purposes:
Second Board Resolution:Board resolution is required to be Pass for following purposes:
CIRCULARS/ NOTIFICATIONS/ AMENDMENT RULES:
|Matters dealt with|
|2(30)||2(12)||Meaning of Debentures|
|56(4)(d)||108, 108A to 108L, 109, 110, 113||Issuance of debenture certificate within 6 months from the date of allotment|
|71||117, 117A to 117C, 118, 119 122||Debentures|
|77||125, 128, 129, 132, 133, 145||Duty to Register charges on secured debentures|
|136||219||Right of Debenture holders to obtain copy of the Annual Accounts|
(a)Secured Debentures: Secured debentures refer to those debentureswhere a charge is created on the assets of the company for the purposeof payment in case of default. A charge ranking PariPassu with the first charge on any assets referred to in Schedule III of the Act excluding intangible assets of the company.
The secured debentureholders have greater protection. Holders of secured debentures remainconvinced about the payment of interest and payment of principal in the event of redemption.
(b) Unsecured Debentures:These debentures are also known as naked debentures. These debenturesare not secured by way of charge on the company’s assets. Interest rate payable on unsecureddebentures is generally higher than that which is payable on secured debentures.
These debentures are issued by a company on the basis of option provided to them for conversion of debenture in the equity shares of the company after a certain period. It may be classified in the following categories:—
a. Convertible Debenture:These debentures are converted into equity shares of the company on the expiry of a specified period.
b. Non- Convertible Debenture:Partly convertible debentures are divided into two portions, viz., convertible and non-convertible portion. The convertible portion is converted into equity shares of the company at the expiry of specified period. The non-convertible portion is redeemed at the expiry of the specified period in terms of the issue.
c. Partly Convertible Debenture:Non-convertible debentures do not have any option to convert the same into equity shares and are redeemed at the expiry of specified period(s).
Basis of negotiability
Debentures issued by a company may be negotiable or non-negotiable. There are following two types of debentures:—
Bearer Debentures.-These debentures are payable to bearer of the debentures and transferable by mere delivery. These debentures are also known as unregistered debentures.
Registered Debentures- These debentures are not transferable by mere delivery of debenture certificates and shall be transferred as per the provisions of the Companies Act, by executing transfer deeds and the transfer registered by the company. Registered debentures are not negotiable instruments. A registered holder of a debenture means a person whose name appears both in the debenture certificate and in the register of debentureholders. Principal and interest amount, when due in respect of these debentures are payable to the registered holders thereof only.
i. Any amount raised by the issue of debentures SECURED BY
• a first charge or
• a charge ranking PariPassu with the first charge on any assets referred to in Schedule III of the Act excluding intangible assets of the company OR
ii. Debentures COMPULSORILY convertible into shares of the company within five years:
According to the above mentioned statement it’s clear that Company can issue two types of Debentures:
i. Debentures secured by charge on any assets referred to in Schedule III of the Act.
ii. Debentures COMPULSORILY convertible into shares of the company within five years.
There is an exemption as per Deposit Rules, company issue debentures on conditions other than mentioned above to Directors, Relative of Directors, Companies and Foreigners.
Debentures are not part of share capital, it is a loan capital and company is liable to pay interestthereon whether there are profits or not.
As per 71(2) Company can’t issue debentures carrying voting rights. Therefore, Debentures holders don’t have any voting rights.
If Company is issuing secured debentures T & C for issuance of such debentures are given in Rule 18of the Companies (Share Capital and Debentures) Rules, 2014.
In case of issue of secured debentures charge can’t be floating charge, Charge will be only fixed charge. Because act says that, any amount raised by the issue of debentures secured by a charge ranking PariPassu with the first charge on any assets referred to in Schedule III of the Act.
Floating charge will be on stock or receivable of the Company. Stock or receivables are not the part of Assets under schedule III. Therefore, charge can’t be create as floating charge in case of issue of secured debentures.
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’ as defined in clause of (b) direction 3 of Infrastructure Debt Fund Non-Banking FinancialCompanies (Reserve Bank) Directions, 2011.]
A company may issue the convertible debentures, whether fully convertible or partly convertible withdetachable warrant. The warrant gives a right to the holder to get equity shares mentioned in the warrant after the expiry of a certain period at a price not exceeding the price fixed in the warrant
As per section 54 of the Companies Act, 2013 there is restriction on the Companies for the issue of shares at a discount. But there is no prohibition on issue of Debentures on discount.
Rule 18(7) of the Companies (Share Capital and Debentures) Rules, 2014 provides that the company shall create a Debenture Redemption Reserve for the purpose of redemption of debentures, in accordance with the conditions given below:
<in case of issued through public issue as per present SEBI (Issue and Listing of Debt Securities), Regulations 2008 and
<in the case of privately placed debentures by listed companies
i. in deposits with any scheduled bank, free from any charge or lien
ii. in unencumbered securities of the Central Government or of any StateGovernment
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 isnotified under sub-clause (f) of section 20 of the Indian Trusts Act, 1882
(g) resolutions passed in pursuance of sub-section (3) of section 179;
 Not required to file in case of Private Limited Company.
For NBFCs registered with the RBI under Section 45-IA of the RBI (Amendment) Act, 1997, [and for Housing Finance Companies registered with the National Housing Bank] ‘the adequacy’ of DRR will be 25% of the value of debentures issued through public issue as per present SEBI (Issue and Listing of Debt Securities) Regulations, 2008, and no DRR is required in the case of privately placed debentures.
(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at [email protected])
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. The observations of the author are personal view and the authors do not take responsibility of the same and this cannot be quoted before any authority without the written consent of the author.