Process and Provisions of Issuance of Debenture under Companies Act, 2013

Process and Provisions of Issuance of Debenture  (Under Section 71 of the Companies Act, 2013)

Summary: Issuing debentures, a method for companies to raise debt capital without equity dilution, is governed by Section 71 of the Companies Act, 2013. Debentures are formal acknowledgements of debt, typically with terms for repayment and interest. While debentures can’t carry voting rights, companies can issue secured debentures or those compulsorily convertible into shares within five years (or ten years for foreign investors under FEMA). Private companies can only issue debentures via private placement under Section 42, not public offers or rights issues. Secured debentures generally have a maximum tenure of ten years, extended to thirty for infrastructure companies. The process involves board and shareholder resolutions, issuing an offer letter, receiving funds, allotting debentures within sixty days, creating a charge, and filing various forms with the Registrar of Companies. A Debenture Redemption Reserve (DRR) is required unless specifically exempted, such as for listed companies or private companies issuing privately placed debentures. A Debenture Trustee must be appointed if debentures are offered to more than 500 persons. The restriction on the number of members in a private company does not apply to debenture holders, as they are creditors, not shareholders.

Introduction

The Companies Act, 2013, heralded a shift in the regulation of corporate financing in India, streamlining and strengthening the legal framework surrounding securities issuance. Among various instruments for raising debt capital, debentures play a significant role in facilitating long-term funding for companies, without diluting ownership. Section 71 of the Companies Act, 2013, specifically governs the issuance of debentures, outlining both the procedural and substantive legal provisions applicable to companies intending to borrow through this route.

For professionals such as Chartered Accountants and Company Secretaries, a comprehensive understanding of Section 71 is vital—not just to ensure procedural compliance, but also to advise boards and investors effectively. This article delves into the detailed process of issuing debentures, types of debentures permitted, restrictions and conditions imposed, and the protective mechanisms for debenture holders, with a special emphasis on practical interpretation and secretarial diligence.

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.

It is one of the methods of raising the loan capital of the Company. A debenture is thus like a certificate of borrowing or a loan bond evidencing the fact that the Company is liable to pay a specified amount with interest and although the money raised by the debentures become a part of the Company’s capital structure, it does not become share capital.

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

Feature of Debenture:

The usual features of a debenture are:-

a. A debenture is usually in the form of a certificate (like a share certificate) issued under the common seal of the company.

b. The certificate is an acknowledgement by the company of indebtedness to a holder.

♦ Legal Provisions:

• Section 71 of Companies Act, 2013.
• Section 42 and Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014 must be complied with.
• Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014
• Regulation 30 and 46(3) of the SEBI (LODR) Regulations, 2015

I. Whether Debenture can have Voting Rights?

A Company may issue debentures with an option to convert into shares, wholly or partly, at the time of redemption but can’t issue debenture with voting rights.

II. Can a Private Company issue debentures through a mode other than private placement

Answer: No, a **Private Company can issue debentures only via private placement under Section 42 of the Companies Act, 2013.

Legal Position:

1. Section 42 – Private Placement:

• • The only permissible route for a private company to issue securities (including debentures) is private placement.
  • Public offers or rights issues are not permitted for private companies.

2. Section 23 of the Companies Act, 2013:

• • It restricts private companies from making a public offer or issuing securities through prospectus.

3. Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014:

• • Specifically governs the private placement process.
  • Mandates prior board and special resolution, offer letter in Form PAS-4, filing Form PAS-3, etc.

III. What is the Maximum Time Period for Issuance of Debentures?

IV. Which type of debentures is allowed to be issue by Companies under the Companies Act, 2013?

i. Any amount raised by the issue of debentures SECURED BY

• a first charge or
• a charge ranking Pari Passu 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.

There is an exemption as per Deposit Rules, company allowed to issue debentures other than mentioned above to Directors, Companies and Foreigners.

Tenure of CCD:

Types of Debentures and to whom allowed to issue or Not

Note:

√ Permitted: Secured NCDs, Secured FCDs (domestic), Unsecured FCDs (within 10 years).

Not Permitted: Unsecured NCDs (private, unlisted), Optional/Partly Convertible Debentures (esp. under FDI), conversion after 10 years in foreign investment cases.

Process of issuance of Debentures:

STEP- I- Holding of Board Meeting

i. Decide whether Company wants to issue secured debenture or convertible debenture or any other mode of debentures.

ii. Get approve the list of such persons to whom offer for subscription will be given.

iii. Present Draft offer letter under PAS-4.

iv. Pass Board Resolution for approval of offer letter.

v. [1]Pass Board Resolution to increase borrowing limit of the Company subject to approval of the Shareholder in General Meeting.

vi. Passing of resolution for Issue the Notice of General Meeting along with explanatory statement. (According to SS-2).

vii. Passing of resolution for Authorize a Company Secretary or director of Company to issue notice of General Meeting.

viii. Passing of Resolution for take note of valuation report.

ix. Notice shall specify place, date, day and the hour of the Meeting and shall contain a statement on the business to be transacted in the Meeting. [Section-101(2)]

x. Authorize a director of Company to issue notice of General Meeting.

xi. Passing of resolution for Open Separate Bank Account for allotment of debentures.

xii. To pass resolution for appointment of debenture trustee. If required.

STEP- II- Holding of Extra Ordinary General Meeting:

xiii. Present Offer Letter in PAS-4 before the members of the Meeting.

xiv. Pass Special Resolution for Private Placement of Debentures.

xv. Pass Special resolution for increasing the borrowing limit of the Company to issue Debentures. (if required)

• File Form with Registrar:
• File MGT-14 with Registrar within 30 days of passing of Special Resolution. Attachments:
• Notice of General Meeting along with Explanatory Statement.
• Certified True copy of Special Resolution.
• Minutes of General Meeting

STEP- III- Issuance of Offer letter:

xvii. Offer letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made.

xviii. Offer Letter sent either in writing or electronic mode.

xix. Issue offer letter within 30 days of General Meeting/recording the name of such person.

xx. Offer letter should mention the name of the Debenture Trustee, if appointed.

STEP – IV- To Hold Meeting of Board of Directors

Within 60 days of receipt of money company have to allot shares by holding of Board Meeting

xxi. Present List of Allottes before the Meeting.

xxii. Pass Board Resolution for allotment of Debentures (within 60 days of receiving of money).

xxiii. Pass Resolution for issue of Debentures Certificate in same Meeting.

xxiv. Authorize to two directors and a authorize person to sign Debentures certificate.

xxv. Enter into Debenture Trust deed (SH-12), If required.

xxvi. To pass a resolution to create Debenture Redemption reserve.

STEP- V-To File form with ROC:

xxvii. File CHG-9 with Registrar of Company. Attachments:

• Certified true copy of resolution authorizing the issue of the debenture series is a mandatory in case of creation of charge.
• Instrument containing details of the charge created or modified is mandatory in all cases.
• Debenture Trust Deed, If prepared.
• Certified True copy of Special Resolution

xxvii. File PAS-3 with Registrar of Company. ATTACHMENTS:

• List of Allottes.
• Certified True copy of Board Resolution for allotment of Debenture.
• Valuation Report
• Certified True copy of Special Resolution

STEP- To Issue of Debenture Certificates:

xxix. Issue Debenture Certificate within 6 (Month) months from the date of allotment of Debentures.

STEP- Payment of Stamp Duty on Issue of Share Certificate:

xxx. Stamp Duty adjudication as per provisions & rates of Stamp Act of the State (only applicable on Marketable Debenture)

 REGISTER OF DEBENTURE HOLDERS

i. Every company issuing debentures shall maintain a register of debenture holders along with an index of debenture holders.

ii. It shall be maintained by the company in the format as prescribed by the central government.

iii. The register may be closed by the company by giving a 7 days notice in newspapers and be closed for a maximum period of 45 days in a year and not exceeding 30 days at a time.

iv. the said register is open for inspection by the members and debenture holders or other security holders of the company during business hours free of cost and for outsiders on a nominal fee as provided by the articles of association.

FLOW CHART:

A. Situations when DRR required to Create for Debentures?

When debentures are issued by a company, the company shall create a debenture redemption reserve account (DRR) out of the profits of the company available for payment of dividend. The amount credited to such account shall not be utilised by the company except for the redemption of debentures.

The requirement to create DRR shall not apply to the following companies issuing debentures on or after 16 August 2019:

• Listed companies (any debentures)
• NBFCs registered with RBI (both public and private, for privately placed debentures)
• Private companies (for privately placed debentures)

 Summary Table:

B. When is it mandatory to appoint Debenture Trustee?

Companies Act, 2013 – Section 71(5):

Where a company issues debentures to more than 500 persons, it shall appoint one or more debenture trustees before the issue of the prospectus or letter of offer.

Rule 18(1)(c) of the Companies (Share Capital and Debentures) Rules, 2014:

A company should appoint a Debenture Trustee if the offer or invitation for debentures is made to more than 500 persons.

√ Threshold: More than 500 people (aggregate, not per series).

C. Can number of debenture holders exceed the limit of 200 in Private Limited Companies?

The restriction of 200 members under Section 2(68) of the Companies Act, 2013 applies only to the number of members (shareholders) of a private company.

This restriction does not extend to debenture holders, since debenture holders are not members, but rather creditors of the company.

Conclusion: In conclusion, the issuance of debentures under Section 71 of the Companies Act, 2013, offers a structured and regulated avenue for companies to secure long-term debt capital without equity dilution. By adhering to comprehensive procedural requirements—from board resolutions and offer letters to the appointment of debenture trustees and compliance with SEBI and FEMA norms—companies ensure transparency and protection for debenture holders. This method not only facilitates diverse funding opportunities but also balances the interests of creditors and corporate governance. The provisions, including the creation of a Debenture Redemption Reserve and adherence to tenure limits, underline the Act’s focus on financial discipline and investor confidence. For businesses and professionals, understanding these nuanced requirements is essential for effective capital management and compliance, solidifying the role of debentures as a vital financial instrument in corporate funding strategies.

Notes:-

[1] This resolution will be passed only in the condition when the current borrowing along with old borrowing exceeding the 100% of paid up share capital and free reserve.

**

Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com).

Also Read:

Issue of Debentures under Section 71 of Companies Act, 2013

Issue of Debentures [Under Section 71 & Rule 18 of Companies (Share Capital & Debenture) Rules, 2014]

All about debentures and issue process

Section 71- Issue of Debentures Under Companies Act, 2013

Debenture Redemption Reserve & Debenture Redemption Fund Requirements

Debenture Redemption Reserve & Investment – Simplified

Issuance of Optionally Convertible Debentures – Overview

Issue of Debentures under Companies Act, 2013

Power to issue debentures | Section 179 | Companies Act, 2013