Facts in Brief:

A Company issue Unsecured Unlisted Non-Convertible Debentures of maturity of three years to private sector bank against the Corporate Guarantee of its holding Company. The Company will appoint a Debenture Trustee and will execute a Debenture Trust Deed.

Query: Whether raising money from a private sector bank by way of issue of unsecured non-convertible debentures would be treated as Deposits?

Relevant Provisions:

Before replying to the query, it is pertinent to understand and analyze the position under the provisions of Companies Act, 2013.

Debenture:

Section 2(30) provide inclusive definition of debentures as follow:

“Debenture include 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.

The debenture is a note of thanks, a certificate issued by a company to lenders that offer loan to the company in exchange of the fixed rate of interest for a long term. These bonds bear the seal of the company and contain the details of the contract for the repayment of the principal sum on a date after the time period of the debentures with the payment of interest at a rate which is also specified in the certificate. The obligations are the responsibility of the company and are reflected as such in the financial statements of the company.

In other words we can say Debenture is a statement by the company that the company will pay a certain some of money on a given day, and will also pay periodical interest at certain time and at certain place.

Thus in term debenture simply means a document acknowledging a loan made to the company and providing for the payment of interest on the sum borrowed until the debenture is redeemed, i.e., repayment of principle sum.

Deposit:

Section 2(31) of the Companies Act defines deposit as under “deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India;

By reading of the definition of debentures and deposits its seems that debentures and deposits both are borrowing and all borrowing or loan or receipts of money or in any other form are deposit except excluded categories. Further borrowing from a bank is excluded from the ambit of deposit vide deposit rules 2(1)(c)(iii).

Refer to Section 73 of the Companies Act, 2013 “Prohibition on acceptance of Deposits from Public”

and

Rule 2(1)(c)(iii) and Rule 2(1)(c)(vii) of Companies (Acceptance of Deposits) Rules, 2014,

“Deposit” includes any receipt of money by way of deposit or loan or in any other form, by a company, but it does not include:

·Any amount received as a loan or facility from any banking company or from the State Bank of India or any of its subsidiary banks or from a banking institution notified by the Central Government under section 51 of the Banking Regulation Act, 1949 (10 of 1949), or a corresponding new bank as defined in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970) or in clause (b) of section (2) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980) , or from a co-operative bank as defined in clause (b-ii) of section 2 of the Reserve Bank of India Act, 1934 (2 of 1934) (sub-rule iii of rule 2 (1) (c) of the Companies (Acceptance of Deposits) Rules, 2014);

·Any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for. {sub-rule 7 of rule 2 (1) (c) of Companies(Acceptance of Deposits) Rules, 2014}.

   Further also we refer to Section 58A of the Companies Act, 1956 “Deposits not to be invited without issuing an advertisement” and Rule 2(b)(ii), 2(b)(vii) and 2(b)(x) of Companies (Acceptance of Deposits) Rules, 1975,

·any amount received as a loan from any banking company or from the State Bank of India or any of its subsidiary banks or from a banking institution notified by the Central Government under section 51 of the Banking Regulation Act, 1949 (10 of 1949), or a corresponding new bank as defined in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or from a co-operative bank as defined in clause (b-ii) of section 2 of the Reserve Bank of India Act, 1934 (2 of 1934); {sub rule ii of rule 2(b) of Companies(Acceptance of Deposits) Rules, 1975}.

In the current scenario, the money raised from the bank is a sort of a debt by issuing debentures which although is not secured by furnishing any asset of the company as security, but secured by providing Corporate Guarantee by the promoters of the Company. Thus the raising of the money is protected from being treated as deposit by operation of rule 2(1) (c) iii of the Companies (Acceptance of Deposits) Rules, 2014.

Moreover Section 73 and Section 76 talks about prohibition of deposits from public and acceptance of deposits from public respectively. The underlying principle behind these Sections is to protect the public who are depositing the marginal saving from their regular income into the Company by way of deposits. These are not to protect the bank whose principal business is to accept deposits and grant loans. It is a regular feature of the Bank to provide loan and other facility as its regular business activities as per the prescribed terms and condition in accordance with the guidelines and regulations issued by the Reserve Bank of India for the purpose of lending amount. Therefore bank could not be treated as public for the purpose of section 73 to section 76 of Companies Act 2013. Accordingly the any amount received as a loan or facility from any banking company or from the State Bank of India or any of its subsidiary banks or from a banking institution notified by the Central Government has been excluded from the ambit of deposits vide rule 2(1) (c) iii of the Companies (Acceptance of Deposits) Rules, 2014.

Further, since the money raised shall be in form of securities which shall be issued by the Company pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities shall keep such an issue out of the ambit of being treated as Deposit. Moreover, it is clear as per the definition of Securities as laid down under Section 2 (h) of Securities Contracts (Regulation) Act, 1956 that “securities” include— (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (ia) derivative; (ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes; (ic) security receipt as defined in clause (zg) of section 2 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (id) units or any other such instrument issued to the investors under any mutual fund scheme; (ii) Government securities; (iia) such other instruments as may be declared by the Central Government to be securities; and (iii) rights or interest in securities.

As per the definition of securities, it includes debentures. Debentures are transferable and tradable/marketable also, if get listed. In contrary to the receipts which are to be issued against deposits which is never be treated as securities and neither transferable nor tradable and not eligible for being listed as securities with a recognized stock exchanges because only a security can be listed on stock exchanges, not deposits.

Inferences Drawn

Therefore in light of the above observations and examination of the provisions of the Companies Act, 2013 and the rules framed there under, we are of the opinion that the amount as proposed to be borrowed by the Company shall not be considered as deposit as per the provisions of the Companies Act, 2013.

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Tags : Companies Act (2171) Companies Act 2013 (1944)

One response to “Issue of Unsecured Non-Convertible Debentures to Private Sector Bank”

  1. binu says:

    Will it be a deposit if the amount is received from an individual and secured by hypothecation of immovable assets of the promoters of the company?

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