11 November 2013
1. Meaning of debentures Section 2(12) of the Companies Act defines the term "debenture" which includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not. In a simple meaning, a debenture means a document, which either creates a debt or acknowledges it, any document which fulfills either of these conditions is a debenture. It may be defined as a certificate of debt or loan given under the common seal of the company evidencing that the company undertakes to pay specified amount with interest. Debentures are not part of share capital, it is a loan capital and company is liable to pay interest thereon whether there are profits or not. Debentures may be secured by way of creating charge on the assets of the company or by way of mortgage of company's property. 2. Basic characteristics of debentures Debenture as a method of raising loan capital is an equally important part of project financing along with share capital. Following are some of the salient features of debentures:— (i) It is a document containing an acknowledgement of indebtedness. (ii) Debentures are issued in form of certificates. (iii) Debenture may be secured or unsecured. Debentures need not necessarily create a charge on the company's assets. Section 2(12) provides that debenture may or may not constitute a charge on the assets of the company. (iv) Debentures are generally issued under the common seal of the company. (v) Debentureholders do not have any right to vote at any meeting of the company. In terms of provisions of section 117 of the Act, no company shall, after the commencement of this Act, issue any debentures carrying voting rights at any meeting of the company, whether generally or in respect of particular classes of business. (vi) Debentures may be convertible or non-convertible. (vii) Debentures may or may not be one of a series. (viii) Debentures carry interest at a fixed rate. 3. Form of debentures The forms of 'debenture' are: (i) simple acknowledgement of debt under seal; (ii) acknowledgement of debt and charging of the property of the company with repayment; and (iii) acknowledgement of debt charging the property with repayment and further restricting the company from giving any prior charge 4. Types of debentures Debentures may be classified into various categories according to the securities, option, negotiability, etc attached with them in terms of their issue. These are as follows:— 4.1. Classification on the basis of security There are following types of debentures on the basis of security:— (a) Secured debentures.—Debentures issued by a company may be secured by way of creating charge on the assets of the company. Debentures may be secured by way of mortgage of company's properties. The secured debentureholders have greater protection. Holders of secured debentures remain convinced about the payment of interest and payment of principal in the event of redemption. (b) Unsecured debentures.—These debentures are also known as naked debentures. These debentures are not secured by way of charge on the company's assets. Interest rate payable on unsecured debentures is generally higher than that which is payable on secured debentures. In the case of unsecured debentures the company must ensure compliance with the provisions of the Companies (Acceptance of Deposits) Rules, 1975 since the unsecured debentures are treated as 'deposits' for the purposes of Companies (Acceptance of Deposits) Rules, 1975. Rule 2(b)(x) of the Companies (Acceptance of Deposit) Rules, 1975 provides that amount raised by the issue of bonds or debentures secured by the mortgage of any immovable property of the company or with an option to convert them into shares of the company, does not constitute a deposit under section 58A. The Department of Company Affairs has clarified vide Circular No. 4/12/8-11CL-X, dated 10-3-1980 that in case of unsecured debentures with an option to convert a part of them into shares only the convertible portion of the debenture is exempt in terms of the provisions of rule 2(b)(x).
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