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Section 71- Issue of Debentures Under Companies Act, 2013

The only section pertaining to the issue of debentures is section 71 (read with Rule 18 of Companies Share Capital and Debentures Rules,2014). I would like to share the some of important issues I came across while studying this section and corresponding rule.
Neha Shekhawat
The only section pertaining to the issue of debentures is section 71 (read with Rule 18 of Companies Share Capital and Debentures Rules,2014). I would like to share the some of important issues I came across while studying this section and corresponding rule.

According to Section 2(12) Companies Act,1956 ” debenture” includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not.

but the above definition is slightly amended by adding the words “evidencing the debt” in the new Companies Act resulting to a huge confusion.Now in Companies Act,2013 the definition of debentures follows like this- ” debenture” includes debenture stock, bonds and any other securities of a company evidencing the debt, whether constituting a charge on the assets of the company or not.

By reading the phrase “any other securities of a company evidencing the debt ” the first thing comes to a mind is whether the commercial paper will be included in the definition or not .And ,if yes then all the provisions relating to the debentures whether it be creating Debentures redemption Reserve ,Liquid funds,etc shall attract for commercial paper too.The above issues is not yet clarified by the MCA ,but there are both the types of professionals thinking both ways.Those who thinks that commercial paper shall not be included in the definition of the debentures says that the commercial paper is the money market instrument defined under Negotiable Instrument Act and Debentures is a security under the Securities Contracts (Regulation) Act ,so it cannot be the same.Those who thinks either way believe so on the stand that as the definition is amended and commercial paper is the instrument evidencing the debt hence shall be included in the definition.Readers are advice to have their own view until some clarification is not issued by MCA.

Second issue i would like to go across is type of charge that can be created for securing debentures.

Rule 18(1)(d) provides, the security for the debentures by way of a charge or mortgage shall be created in favor of the debenture trustee on-

(i) any specific movable property of the company (not being in the nature of pledge); or

(ii) any specific immovable property wherever situate, or any interest therein.

The term SPECIFIC used in the above sub-clauses states that the charge shall be created on specific property. In other words,company cannot create floating charge, it has to be fixed . Now how a company having no specific assets (lets say NBFC’s have customer’s loans as their assets) will issue secured debentures.The only option left for NBFC’s is to issue compulsory convertible debentures as they they need not to be secured or to issue unsecured debentures for any time period ,as the Rule 18(1)(a) prescribed time limit for issue of secured debenture ,unsecured debentures can be issued for any time period.By issuing compulsory convertible debentures a company can even skip the requirement for creating debenture redemption reserves and liquid funds, the given below provision have led me to this conclusion.

Rule 18(7) provides- The company shall create debenture redemption reserve for the purpose of redemption of debenture  (i.e if the company issue compulsory convertible debentures the question regarding redemption will not arise as they are converted after some period and not redeemed) ,in accordance with conditions given below-

a) The DRR shall be created out of the divisible profits of the company.

b) the company shall create DRR of at least 50% of the amount raised through debentures through issue before redemption commences. (MCA has provided exemption to certain class of companies in its April,2013 circular)

c) every company required to create DRR (It may be noted that a company which is not required to create DRR is not required to invest or deposits such amount) shall before or on 30th April in each year,invest or deposits at least 15% of the amount of debenture maturing during the year ending on 31st March of next year,in any one or more of the following ways given thereby (In simple words the company shall within 30 days of the commencement of FY deposit or invest at least 15% of the amount of debentures maturing till 31 March)

The amount invested or deposited shall not be used for any other purpose other than for redemption of debenture maturing during the year. 

Provided that the amount deposited or invested shall not fall below 15% of debentures maturing till 31st March of that year.

d) In case of the partly convertible debentures, DRR shall be created for the non-convertible portion as only that portion is redeemable. And have already studied above that every company required to create DRR shall invest or deposit in liquid funds here also the company have to invest or deposit in liquid funds for non-convertible portion.

(Author can be reached at nstomboy@gmail.com)

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Categories: Company Law

View Comments (15)

  • Please also refer to Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014. It has created unnecessary confusion over requirement of special resolution for issue of non-convertible debentures. Section 71 says that special resolution is required only for convertible securities. Additionally, most of the companies issuing NCDs obtain special resolution under Section 180(1)(c). Rule 14 should be amended to remove requirement of special resolution.

  • Dear Madam,

    Thanks for your posts which are very useful.

    I need a clarification on the NCD. We have less tangible asset value on the balance sheet than the debentures we are going to issue, Please suggest is any provision to take the current market value of the tangible assets? If yes, under which
    section it permits.

    Regards
    Rajavardhana HS

  • Hello Neha,

    I came across this article written by you on "Section-21 of Company act" which was very well written and enriching information. Further to the information as mentioned in the article I have following queries to you if you could answer me on that.

    1) If ZCCC Debentures are issued to a company then is there any specific time frame (Minimum or maximum) when such debentures are to be converted into shares?
    2) As per law, is there any specification about the rate to be decided about such conversion of shares from ZCCC Debentures into shares.
    3) Can a company of whose core business is not investment, buy a ZCCC Debentures in any company (or a parent company)?

    I would appreciate if you could help me find answers to aforementioned questions along with relevant sections of Law.

    Your prompt reply will be appreciated.

    Kind Regards,
    Sourabh Maggo
    sourabhmaggo@gmail.com
    09910153069

  • Company's debenture are maturing on 2nd April 2016 when the investment required to be made according to rule 18 (7)

  • Can a Unlisted Public Company redeem 0% FCD for cash instead of conversion at the request of Debenture Holder?

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