Issue of Debentures [Under Section 71 & Rule 18 of Companies (Share Capital & Debenture) Rules, 2014]
The debentures issued by a company is an acknowledgment that the company has borrowed an amount of money from the public, which it promises to repay at a future date. Debenture holders are, therefore, creditors of the company. A debenture does not carry voting rights, financing through them does not dilute control of equity shareholders on management. The issue of debentures is appropriate in the situation when the sales and earnings are relatively stable.
The majority of debentures come with a fixed interest rate and this interest must be paid before dividends are paid to shareholders. In the US, most debentures are unsecured, but elsewhere debentures are typically secured through the borrower’s assets.
If we talk about the classification of debentures in terms of its redemption modes then the same can be classified into two modes:
- Convertible Debentures- These can be converted into company stocks and this option lies in hands of the holder of the debentures.
- Non- 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). They are usually listed on the exchanges and any investor with a demat account can invest in it. Further the NCD can be classified into secured and unsecured.
Now the Governing sections and Rules prescribed in the Companies Act, 2013 which needs to be look into while issuing debentures are:
Through this Articles we will be discussing the detailed process for issuance of Debentures and the same can be concluded as follows:
1. Convene and hold Board Meeting and in that Board meeting:
- Decide the type of debenture to be issued after resolving to issue debentures.
- Draft offer letter should be approved to be placed privately in the Form no PAS 4 in the debentures subscription Agreement
- A draft for private placement offer should also be approved for Form no PAS 5
- Appointment of trustee for Debenture should also be resolved if the debenture type is secured in nature
- The board should be authorized to create the charge in form CHG-9 on the company’s assets as far as secured debentures are concerned.
- Open separate bank account for receiving subscription money for further issue of CCDs.
- Shareholders Extra-Ordinary General Meeting calling should be taken care of as per Section 180(1) (c), if there is an increase of borrowing power of the Board of Director.
- Notice for Extra-Ordinary General Meeting to be issued along with the explanatory statement
- As per Section 42, the Board of Directors should be authorized to open a separate account for the issue proposed.
2. Call the Extra-Ordinary General Meeting
- to consider and approve to increasing the Board members borrowing power by passing a special resolution. MGT-14 must be filed within a period of 30 days from the date of passing of Special resolution.
- Approving Offer letter which should be dispatched to the shareholders
- The application format accompanying the offer letter should be used by the applicant to apply for the Securities allotment by paying the application money.
- To pass resolution for the allotment of CCDs
- Offer letter should be filed at ROC by filling form PAS-4 and PAS-5 as an attachment along with GNL-2
- Approval for filing of form PAS-3
- Approval for filing of form FC-GPR in case of foreign subscriber is involved.
3. The Board meeting should be called to approve the following;
- As per Section 42(6), the debentures allotment should take place within the span of 60 days from the date immediately after receiving funds. CHG-9 should be filed within the span of 30 days from the date of special resolution passing (if the company has issued secured debentures)
- Return on the allotment to be filed for the PAS 3 within thirty days period from the date of Allotment with List of allottees, Board resolution for allotment, Valuation report, Copy of special resolution passed.
- Debenture trust deed draft to be approved in case of Secured debentures. (if the company has issued secured debentures)
- Debenture certificate to be issued.
4. Points to be keep in mind while appointing Debenture Trustee or Trustees (if the company has issued secured debentures).
- Debenture Trustee needs to be appointed before issue of offer letter but not later than 60 days after the allotment.
- Written Consent needs to be obtained from the Debenture trustee.
5. A trust deed in Form No.SH.12 or as near thereto as possible shall be executed by the company issuing debentures in favour of the debenture trustees within three months of closure of the issue or offer (if the company has issued secured debentures).
6. 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.
- Debenture Redemption Reserve shall be created out of profits of the company available for payment of dividend;
- For unlisted companies other than All India Financial lnstitutions and Banking Companies, the adequacy of Debenture Redemption Reserve shall be ten percent of the value of the outstanding debentures.
NOTE: IT SHOULD BE NOTED THAT RULE 18 APPLIES ONLY IN THE CASE OF SECURED DEBENTURES
IN SHORT BELOW MENTIONED COMPLIANCES NEEDS TO BE COMPLIED WITH IN CASE OF ISSUANCE OF DEBENTURES:
- Calling of Board Meeting
- Draft offer letter in Form PAS-4 (Letter for Private Placement)
- Preparation of Form PAS-5 (Record of a private placement)
- Preparation of Valuation report by the registered valuer
- Calling of Extra Ordinary General Meeting for passing Special Resolution
- Open a separate Bank Account
- Appointment of Debenture Trustees (In case of Issuance of Secured Debentures)
- Form GNL 2 for filing of Form PAS-4 and PAS-5
- Form PAS-3 (For Allotment)
- Form PAS-4 (Letter for Private Placement)
- Form PAS-5 (Record of a private placement)
- Form MGT-14 (Filing of Special Resolution)
- Form CHG-9 (Filing of Charge form in case of secured debentures)
- Preparation of Trust Deed for Debenture trustees Form SH-12 (In case of Secured Debentures)
- Filing of Form FCGPR for Allotment in case of Foreign Subscribers.