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Section 71 of the Companies Act, 2013 (Companies Act) permits a company to 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, wholly or partly, shall be approved by a special resolution passed at a general meeting.
Key features of debentures:
- Debentures do not carry voting rights.
- Debentures may be secured or unsecured.
- Debentures may be convertible or non-convertible.
- Debentures can be redeemable or irredeemable debentures.
- Debentures carry interest at a fixed rate (which can also be a zero rate).
- Issuer company needs to create a debenture redemption reserve account (“DRR”) out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilised by the company except for the redemption of debentures.
- Note: Rule 18 of the Companies (Share Capital and Debentures) Rules 2014, provides a ten years redemption period for secured debentures. There is no redemption time frame provided for unsecured debentures.
1. A company must allot the debenture certificates within 6 months from the date of allotment.
2. Stamp duty: Stamp duty on issuance of debentures is governed by the Indian Stamp Act, 1899 and is payable at the rate of .05% per year of the face value of the debentures, subject to the maximum of 0.25% or Rs 25 lakh, whichever is lower. Eg: On debentures worth Rs. 20 Crores, stamp duty would be Rs. 1 lakh.
3. Utilisation of Funds: Pursuant to the Companies (Amendment) Act, 2017 the issuer is not permitted to utilise any monies raised through private placement till the allotment is complete and the return of allotment (Form PAS 3) is filed with the Registrar of Companies within 15 days of allotment. The requirement of keeping money in a separate bank account continues.
4. Penalty for non-compliance: The penalty under Section 42 is two-fold:
- If a company defaults in filing the return of allotment within 15 days of allotment, the company, its promoters and directors shall be liable to a penalty for each default of one thousand rupees for each day during which such default continues but not exceeding twenty-five lakh rupees.
- If a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount involved in the offer or invitation or two crore rupees, whichever is higher, and the company shall also refund all monies to subscribers within a period of thirty days of the order imposing the penalty.
Pros and cons of issue of debentures:
| Pros | Cons |
| Does not alter the shareholding structure and the voting rights pattern | The issuer is not permitted to utilise any monies raised through issue of Debentures till the allotment is complete and the Return of Allotment (Form PAS 3) is filed with the Registrar of Companies within 15 days of allotment. |
| Rate of stamp duty is only 0.05% per year only which is much lower than the stamp duty payable on a shareholder loan. | A separate bank account to be opened and monies cannot be utilised till the Return of Allotment is filed with the ROC. |
| Payment of interest can be yearly. | Have to create a Debenture Redemption Reserve |
| No statutorily mandatory redemption/ conversion horizon for unsecured debentures | |
| Rank in priority to equity shares, in case of a liquidation event. |
Procedure for issue of Debentures:
| S. No. | Particulars |
| 1. | Convene and hold Board Meeting to pass the necessary Resolutions for issue of debentures, approving the Offer Letter, Debenture Subscription Agreement, opening of bank account and calling of the Extra-Ordinary General Meeting. |
| 2. | Convene and hold Extra-Ordinary General Meeting to consider and approve the following items: –
a. Increase in the Borrowing powers of the Company already in place. b. Issue of non-convertible debentures |
| 3. | The Offer to be restricted to 200 Investors, in the aggregate, in any financial year |
| 4. | Investment size of not less than Rs. 20,000 per investor. |
| 5. | Dispatch of Letter of Offer to the investors and opening of bank account. |
| 6. | Filing of Offer Letter with ROC. |
| 7. | Convene and hold Board meeting after the closure of Offer, to make the allotment of Debentures within 60 days from the date of receipt of funds. |
| 8. | The issuer is not permitted to utilise any monies raised through issue of Debentures till the allotment is complete and the Return of Allotment (Form PAS 3) is filed with the Registrar of Companies within 15 days of allotment. Also to file Corporate Action within 2 working days of allotment. |
Additional compliances under Chapter III & V of the Securities & Exchange Board of India (Listing Obligations & Disclosure Requirements) Regulations, 2015 for listing of Non-convertible Debentures:
SEBI Compliances for listing of Non-convertible Debentures
| S. No. | Particulars |
| 1. | Appointment of Independent Directors and the constitution of `Audit Committee’ (AC) and ‘Nomination & Remuneration Committee’ (NRC).
This exemption is granted only to an `unlisted public company’. |
| 2. | Make an application for listing of debt securities to recognised stock exchange (SE). |
| 3. | Appoint one lead Merchant Banker. |
| 4. | Obtain due diligence certificate by a lead merchant banker. |
| 5. | A large company will not be permitted to raise less than 25% of its incremental borrowings during a FY, by way of issuance of debt securities. |
| 6. | To obtain Credit rating in respect of debt securities and to get it reviewed at least once a year. |
| 7. | Intimate the SE, 2 working days prior to the Board Meeting (excluding the date of the intimation and date of the meeting) at which the recommendation or declaration of issue of NCD’s or any other matter affecting the rights or interests of holders of NCDs is proposed to be considered. |
| 8. | To submit a certificate to the SE within 2 days of the interest or principal or both becoming due that it has made timely payment of interests or principal obligations or both in respect of the NCDs. |
| 9. | Website needs to be created for uploading financial statements; details of business; contact information of designated professionals who are responsible for assisting and handling investor grievances; email address for grievance redressal; all documents concerning NCDs; information with respect to default by company to payment of interest and revision of rating assigned to NCDs. |
| 10. | The final documents to be submitted to SE and host on the website of the Company, SE, merchant banker in PDF / HTML format. Make an advertisement in national daily with wide circulation, before the issue opening date. |
| 11. | Notice of all meetings where the rights of the debenture holders is discussed shall be sent to NCD holders along with Proxy Forms. |
| 12. | The listed entity shall, within two calendar days of the conclusion of the meeting of the Board of Directors, publish the financial results in at least one English national daily newspaper circulating in the whole or substantially the whole of India. |
| 13. | To submit unaudited (with limited review) or audited financial statements on half yearly basis to SEs within 45 days, on a standalone basis & not consolidated. |
| 14. | Annual Reports shall be provided to holders of NCDs and also certain half yearly communication to be provided |
| 15. | To inform promptly, the SE of all the information having a bearing on the performance/operations of a listed company, or if it is price sensitive or affects the payment of interest/redemption |
| 16. | The Company will be required to maintain 100% asset cover, sufficient to discharge the principal amount at all times |
| 17. | Prior intimation to SEs about the interest & redemption amount and dates, proposal about raising of funds. |
| 18. | The Company to issue a Press Release for the abovementioned events. |
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what are consequences on directorship if intrest on debentures not paid on due date ? is it sec 164(1)(d) override than sec 164(2)(b)?