All about Debentures under Companies Act, 2013

Sometimes when the Company is in need of funds without diluting its equity state, the Company opts for Debentures Issue. Debenture is debt to the Company. It’s like a loan which needs to be repaid over a certain period of time. Debentures carry fixed interest rate. Lets discuss more on debentures. Both corporations and governments frequently issue debentures to raise capital or funds.

As per Section 2(30) of Companies Act, 2013 “debenture” includes 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;

[Provided that—

(a) the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; and

(b) such other instrument, as may be prescribed by the Central Government in consultation with the Reserve Bank of India, issued by a company, shall not be treated as debenture;]

From the above definition we conclude that debentures are a type of bond or loan which a company takes against security or in any other form.

Nature of Debentures:

1. Debentures for cash

As defined above, debentures are usually issued for raising funds for the company. They are mainly issued for cash. The Debentures can be issued either at par, at discount or at premium.

2. Debentures as collateral security

A collateral security is additional security along with the primary security when a company obtains loan or overdrafts facility from a bank or any other financial institution. Debentures issued as such a collateral liability are a contingent liability for the company, Only when the company defaults on such a loan plus interest will this liability arise.

3. Debentures issued as consideration other than cash

This is another type of issue of debentures. Sometimes company requires some assets or machineries, plants, equipments which are huge in cost. The company need not have money at that particular time for the payment. So, instead of making payment in cash, the Company issues debentures to the vendor against such purchase with the terms of payment of the consideration other than cash.

Types of Debentures:

1. Secured/ Unsecured Debentures

As the name suggest, the debenture issue can be secured by a mortgage or charge on the property of the company and when the same are not secured they are known as unsecured (with nominal collateral security) debentures.

2. Convertible/ Non-Convertible Debentures

The debentures issued can be convertible or non-convertible, which means they can be converted into equity shares on a specified date or on non-happening of a certain event as prescribed in the Debenture Trust Deed.

3. Redeemable/ Irredeemable Debentures

Redeemable debentures means the debentures will be redeemed on the expiry of the debenture issue and irredeemable debentures means the company will not redeem its debentures and only interest will paid to the debenture holders until the company wishes to redeem or cancel the debentures.

Voting Rights

The debentures do not carry any voting rights as they are debt to the company which needs to be paid off. However, when the debentures are issued at the option of conversion, then ones converted to equity they shall carry voting rights as other equity shares.

Conditions for Issue of Debentures

The Act has prescribed certain condition which needs to be fulfilled prior to issue of debentures:

1. The redemption of secured debentures not to exceed 10 years from issue date. However following classes of companies can issue Debentures for more than 10 years but not exceeding 30 years:

(i) Companies engaged in setting up of infrastructure projects;

(ii) ‘Infrastructure Finance Companies’ as defined in clause (viia) of sub direction (1) of direction 2 of Non-Banking Financial (Non-deposit accepting or holding) Companies Prudential Norms (Reserve Bank) Directions, 2007

(iii) Infrastructure Debt Fund Non-Banking Financial Companies’ as defined in clause (b) of direction 3 of Infrastructure Debt Fund Non-Banking Financial Companies (Reserve Bank) Directions, 2011;

(iv) Companies permitted by a Ministry or Department of the Central Government oi by Reserve Bank of India or by the National Housing Bank or by any other statutory authority to issue debentures for a period exceeding ten years.

2. The issue shall be secured by way of charge on the properties or assets of the company or its subsidiaries or its holding company or its associates companies, having a value which is sufficient for the due repayment of the amount of debentures and interest thereon

3. Appointment of Debenture Trustee before the issue for executing a debenture trust deed.

4. Creation of charge in favour of Debenture Trustee.

Issue of Debentures

1. Authorized by AOA

2. Check the borrowing limit, if need to be increased (can be done separately before issue or can be approved at the same meeting)

3. Valuation Report for arriving at a price of debentures.

4. Opening of Separate Bank Account for Debenture Issue and parking the monies there.

5. Call Board Meeting to approve the following

• Offer letter approval in Form PAS-4 and Application forms
• Approval of Form PAS-5 for recording private placement offer
• Appointment of Debenture Trustee and Debenture Trustee Agreement.
• Approval of Debenture Subscription Agreement.
• To authorize creation of charge on assets of company in case of secured debentures.
• To fix date and time for shareholders meeting EGM/AGM.

6. Issue notice of Extra-Ordinary General Meeting/ Annual General Meeting to shareholders

Issue notice of EGM/AGM to shareholders along with explanatory statement which shall include the details of the debenture issue along with valuation report, debenture agreements and all other terms and conditions of such issue.

7. File Form MGT-14.

8. Send offer letter in PAS- 4 to the identified debenture holders and record the same in Form PAS-5

9. Ones the allotment monies is received in the bank account call for another board meeting for allotment of debenture, debenture certificate, creation of debenture redemption reserve and debenture deed (Form SH-12)

10. Filing of Form PAS-3 for return of allotment

11. Issue of Debenture Certificate to Debenture Holders

Debenture Redemption Reserve

Debenture Redemption Reserve (DRR) is a reserve required to be created by the company issuing debentures. It is a form of reserve set aside out of the profits of the company. Section 71(4) of the Companies Act, 2013 mandates every company issuing debentures to create a 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.

Redemption of Debentures

1. Conduct Board Meeting for the redemption of debentures.

2. Intimate the debenture holders about the redemption

3. Coordinate with banks for refund

4. Changes in debenture register

5. Changes in charge register, if any charge created on debentures

Further in case of Compulsory/Optionally Convertible Debentures, if at the time of issue the shareholders approval was not taking for the conversion part, then the approval of shareholders is necessary while such conversion.

Also if the debentures are redeemed out of the profits of the company, the shareholders approval is required to be taken.

Debentures & Deposits

As a layman’s language depositing means to parking ones monies with someone which shall fetch interest along with the principal. Debentures are also a kind of deposit wherein people park their monies with a view of earning interest on the same. As per the Companies (Acceptance of Deposit) Rules 2014, certain debentures are not treated as deposits:-

1. Secured debentures by first charge or having pari passu charge with the first charge (here the assets charged shall be tangible assets of the company referred in Schedule III of the Companies Act, 2013)

2. Debentures which are compulsorily converted into equity after 10 years.

3. Unsecured Non-Convertible Debentures and listed on recognized stock exchange

All other types of Debentures are considered as deposit and same needs to be filed every year in Form DPT-3 by the Company.

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Disclaimer: This article is written merely for informational purposes and it should not be taken as a legal advice. The readers are advised to consult competent professionals before acting on the basis of any information provided here.