Section 2 (30) of the Companies Act, 2013 defines the term Debentures as “debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not;
Debenture is a debt acknowledged by a Company whether constituting a charge on the assets of the Company or not, whether convertible into shares at a later stage or not. Which means that a Debenture can be Secured or Unsecured, it can be Convertible (either wholly or partly) or Non-convertible. As Debentures are in the form of debt, unlike shares they don’t carry voting rights.
Applicable laws: –
1. Companies Act, 2013
2. Companies (Share Capital & Debenture) Rules, 2014
Section 71: – A Company may issue debentures with an option to convert into shares, wholly or partly, at the time of redemption but cannot issue debentures with voting rights.
Things to keep in mind while issuing debentures: –
1. Debentures cannot be issued with voting rights.
2. A company cannot issue debentures to more than 500 people without appointing a debenture trustee, whose duty would be to protect the interest of Debenture Holders and redress their grievances.
3. On issue of debenture a company shall create a Debenture Redemption Reserve. (DRR)
4. If there is any default in repayment of amount in the event of maturity or default in payment of the interest thereon then the Tribunal will be approached by the Debenture Trustee to take appropriate measures
5. If there is any default with the provisions of this section then the Company and the Officers shall be liable to fine or imprisonment or both.
Companies (Share Capital & Debenture) Rule, 2014
Rule 18: debentures
A Company shall not issue SECURED DEBENTURES unless in complies with the following conditions namely: –
[it should be noted that Rule 18 applies only in the case of secured debentures]
1. The Company shall make an issue of Secured Debentures provided the date of its redemption shall not exceed 10 years from the date of it issue. Provided that an Infrastructure finance companies, Companies engaged in Infrastructure projects, Infrastructure Debt Fund Non-Banking Financial Companies and Companies permitted by Ministry or Department of Central Government or by RBI can issue Debenture beyond a period of 10 years but up to 30 years.
2. Such issue of debenture should be secured by creation of charge having value for the due payment of the debenture and the interest thereon.
3. The company shall appoint Debenture Trustee and before the issue of prospectus or LOO and not later than 60 days from allotment execute a DTD to protect the interest of debenture holders.
4. The Charge shall be created in favor of the Debenture trustee.
5. Qualification and role of Debenture Trustee must be clearly set out.
6. The Debenture Trust Deed shall be in Form SH-12 or as near thereto as possible.
7. Every Company required to create DRR shall on or before the 30th day of April Deposit or invest 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 31st day of March of the next year.
8. Nothing contained in this rule shall apply to any amount received by a Company against issue of commercial paper or any other similar instrument issued in accordance with the guidelines or regulations or notification issued by Reserve Bank of India. [Companies (Share Capital & Debenture) Amendment Rules, 2015 vide Notification No. G. S. R. 210(E) dated 18.03.2015 w.e.f. 18.03.2015.]
9. This rule shall also not apply to the issue of Foreign Currency Convertible Bonds issued in accordance with Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 or regulations or directions issued by Reserve Bank of India. [Companies (Share Capital & Debenture) Amendment Rules, 2015 vide Notification No. G. S. R. 210(E) dated 18.03.2015 w.e.f. 18.03.2015.]
Procedure for issue of Debentures: –
|S. No.||Particulars||Time frame|
|1.||Convene and hold Board Meeting and decide which type of Debenture would be issued.|
|2.||In the Board Meeting pass the following resolution:
a. Resolve to issue debentures and decide its type. (terms and conditions)
b. Approve the draft Offer Letter for Private Placement in form No. PAS 4 and Debenture Subscription Agreement.
c. Approve the draft for record of a private placement offer in Form No. PAS 5.
d. Take written consent of the Debenture Trustee. [Rule 18(2)(b)] only in the case of secured debentures
e. Resolve and approve the appointment of debenture Trustee. Only in the case of secured debentures.
f. Approve the Debenture Trustee Agreement. Only in the case of secured debentures.
g. Authorize the Board for the creation of charge on the assets of the Company. Only in the case of secured debentures.
h. Calling of Extra-Ordinary General Meeting of the 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). [if applicable]
i. Issue notice of extra-ordinary general meeting and explanatory statement for the same.
j. Authorizing the Board of Directors to open a separate bank account for the proposed issue. (Section 42)
|3.||Convene and hold Extra-Ordinary General Meeting to consider and approve the following items: –
a. Increase in the Borrowing power of the Board of Directors by passing SR. if applicable.
|File MGT-14 within 30 days of passing of SR|
|4.||Dispatch of Letter of Offer to shareholders and opening of Bank Account|
|5.||Filling of offer letter to ROC||Filing PAS 4 & PAS 5 as attachment with GNL 2|
|6.||Receiving of Money
The applicant shall make the application in the format given with the offer letter for allotment of securities and shall pay the application money
|7.||Convene and hold Board meeting to consider and approve the following items: –
a. After closure of offer the Board shall make the allotment of Debentures within 60 days from the date of receipt of funds. [Section 42(6)]
b. Approval of draft agreement for Charge creation & authorizing the director for signing the same.
c. Approval of the draft of Debenture Trust Deed [SH–12]. Only in case of secured debentures.
|Filing of CHG-9 within 30 days from the date of creation of charge.
Filing Return on Allotment in PAS-3 within 30 days of allotment.
|8.||Issue of Debenture Certificate|
** It should be noted that any other debenture other that Secured debenture secured by a first charge or ranked pari passu to first charge OR a bond or debenture which is compulsorily convertible into shares of the company within 10 years from the date of issue are considered as deposits for the purpose of Companies (Acceptance of Deposit) Rules, 2014.
Therefore the Debentures which are proposed to be issued should either be secured by way of creating first charge or ranked pari passu to first charge OR a debenture which is compulsorily convertible into shares within 10 years from the date of issue should be issued in order to avoid the implication of Deposit Rules, 2014 as amended upto date.