Issue Of Debentures Under Companies Act, 2013

As per section 2(30) of the 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. 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.

A debenture is a type of long-term debt instrument issued by a company or government entity to raise capital. It is a bond or loan that is backed by the issuer's general creditworthiness rather than specific assets. Debentures typically have a fixed interest rate and maturity date, and investors receive periodic interest payments until the maturity date when the principal amount is repaid.

Why debentures are issued?

Debentures are issued by companies and government entities as a means of raising capital or funds for various purposes. Some common reasons why debentures are issued include:

• Financing expansion or growth: Companies may issue debentures to raise funds for expanding their operations, acquiring new assets, or funding research and development activities.
• Meeting working capital needs: Debentures can be used to address short-term liquidity requirements or to manage cash flow gaps during business operations.
• Refinancing existing debt: Companies may issue debentures to refinance existing debt obligations, taking advantage of favorable interest rates or extending the repayment period.
• Funding acquisitions or mergers: Companies may issue debentures to finance the acquisition of other companies or to support merger activities.
• Capital expenditure: Debentures can be used to finance capital expenditures such as purchasing machinery, equipment, or property.

By issuing debentures, companies and governments can access a broader pool of investors and diversify their sources of funding beyond traditional loans or equity. Debentures offer fixed income to investors, while providing the issuer with long-term capital that can be repaid over a specified period.
 

DEBENTURES CAN BE CLASSIFIED AS

On the basis of convertibility debentures can be classified as

1. Partly Convertible Debentures: When a part of debentures is to be converted into Equity shares at some future period of time by the issuer are called as partly convertible debentures.
2. Fully Convertible Debentures: When the debentures are fully to be converted into Equity shares at some future period of time by the issuer are called as partly convertible debentures.
3. Non-Convertible Debentures: These debentures cannot be converted into Equity shares.

On the basis of security debentures can be classified as

1. Secured Debentures: These instruments are secured by a charge on the fixed assets of the issuer company. So, if the issuer fails on payment of the principal or interest amount, his assets can be sold to repay the liability to the investors.
2. Unsecured Debentures: Unsecured debentures are issued by the Company without creation of charge over the assets of the Company. In case a Company is unable to pay the principal or interest on due date, these debentures do not offer any protection to the debenture holders.

On the basis of Redemption debentures can be classified as

1. Redeemable Debentures: When the debentures are issued with a condition to redeem at a fixed date or upon demand are called as redeemable debentures.
2. Irredeemable Debentures: No Company can issue irredeemable debentures.

On the basis of Registration debentures can be classified as

1. Registered Debentures: Registered debentures are made out in the name of a particular person, whose name appears on the debenture certificate and who is registered by the company as holder on the Register of debenture holders.
2. Bearer debentures: Bearer debentures on the other hand, are made out to bearer, and are negotiable instruments, and so transferable by mere delivery like share warrants.

PROVISIONS UNDER COMPANIES ACT, 2013 FOR ISSUE OF DEBENTURES

As per section 71(1) a company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption and such issue shall be approved by a special resolution at a general meeting.

The company cannot issue debentures to more than 500 persons unless it appoints one or more debenture trustees.

When a company issues debentures, it shall create a debenture redemption reserve account out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilized by the company except for the redemption of debentures.

CONDITIONS FOR ISSUING SECURED DEBENTURES

Pursuant to the provisions of section 71(3) read with rule 18 of the Companies (Share Capital and Debentures) Rules, 2014 the company cannot issue secured debentures, unless it complies with the following conditions:

1. Term of Issue

Secured debentures cannot be issued for a period more than 10 years from the date of issue.

Following class of companies may issue debentures for more than 10 years but not exceeding 30 years:

• Companies engaged in setting up of infrastructure projects
• Infrastructure Finance Companies
• Infrastructure Debt Fund Non-Banking Financial Companies
• Companies permitted by a Ministry or Central Government or RBI

2. Appointment of Debenture Trustee

The company shall appoint debenture trustee before the issue of prospectus or letter of offer for subscription of its debentures and within 60 days of allotment, execute a debenture trust deed to protect the interest of debenture holders.

3. Secured by Charge

Such issue of debentures shall be secured by creating a charge on the assets of the company.

4. Charge or Mortgage in favour of debenture trustee

The charge or mortgage shall be created in the favour of debenture trustee.

5. Creation of Debenture Redemption Reserve (DRR)

The company shall create a Debenture Redemption Reserve for the purpose of redemption of debenture in following manner:

(a) Debenture Redemption Reserve shall be created out of the profits of the company available for payment of dividend.

(b) Debenture Redemption Reserve (DRR) is not required for issue of debentures by:

• All India Financial Institutions regulated by Reserve Bank of India
• Banking Companies

(For other Financial Institutions, DRR will be applicable to NBFCs registered with RBI)

(c) Every company required to create Debenture Redemption Reserve shall on or before 30^th April in each year, invest or deposit a sum which shall not be less than 15% of the amount of its debentures maturing during the year ending on 31^st March of the next year, in any one or more of the following methods:

• In deposits with any schedule bank
• In unencumbered securities of the Central Government or any of State Government
• In unencumbered securities of the Indian Trusts Act, 1882
• In unencumbered bonds issued by any other companies which is notified by Indian Trusts Act,1882

(d) In case of partly convertible debentures, DRR shall be created in respect of non-convertible portion of debenture.

PROCEDURE FOR ISSUE OF DEBENTURES

1. Identifying persons and preparing draft offer letter

• Identify and prepare list of persons to whom offer letter will be given.
• Prepare Draft offer letter in PAS-4

2. Calling Board Meeting

• Issue Notice of Board Meeting to all directors of company at least 7 days before the date of Board Meeting.

3. Hold Board Meeting

• To consider and approve list of persons to whom offer letter will be given.
• To approve draft offer letter.
• Consider opening of separate bank account for allotment of debentures.
• Appointment of debenture trustee (if applicable)
• Authorize Company Secretary or director to issue notice of Extra Ordinary General Meeting.

4. Calling Extra Ordinary General Meeting

• Issue Notice of Extra Ordinary General Meeting to all shareholders at least 21 days before the date of meeting.

5. Hold Extra Ordinary General Meeting

• Pass special resolution for issue of debentures.

6. Circulate Offer Letters in PAS-4

• Issue offer letter within 30 days of EOGM/ recording the name of such person.
• Offer letter shall be along with an application form serially numbered and addressed specifically to the person to whom the offer is made.

7. File Form with Registrar

• File MGT-14 with Registrar within 30 days of passing special resolution.
• Private companies are not required to file MGT-14

8. Opening of Separate Bank account

• The payment to be made for subscription to securities shall be made from the bank account of the person subscribing to such securities.

9. File Form with Registrar

• File GNL-2 with Registrar within 30 days of circulation of offer letter.

10. Calling Board Meeting

• Issue Notice of Board Meeting to all directors of company at least 7 days before the date of Board Meeting.

11. Hold Board Meeting

• Present a list of Allottees before meeting.
• Pass Board Resolution for allotment of debentures within 60 days receiving of money.
• Pass Board Resolution for issue of debentures and any authorized person to sign debenture certificate.

12. File Form with Registrar

• File PAS-3 with Registrar within 15 days from the date of allotment.

The author can also be reached at csneharedekar@gmail.com

Disclaimer: Please note that the above article is based on the interpretation of related laws, which may differ from person to person and is not a legal advice.