Debenture is most important instrument to raise capital for a company. A company use debenture to raise debt capital. Popularly, debenture issued by public sector companies with government approval is called bonds.
Section 2 (30) of the Companies Act, 2013 define inclusively debenture as “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 clear from definition that debenture may be Secured Debenture or Unsecured Debenture.
According to Section 44, the shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company.
The certificate of debenture shall be issued within a period of six months from the date of allotment in the case of any allotment of debenture. [Section 56(4)(d)]
Section 71 extensively deals with debentures.
A company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption. The issue of debentures with an option to convert such debentures into shares, wholly or partly, shall be approved by a special resolution passed at a general meeting.
This means debenture may be non – convertible debenture or convertible debenture. Convertible debenture may either be Fully Convertible Debenture (FCD) or Partly Convertible Debenture.
No company shall issue any debentures carrying any voting rights.
Secured debentures may be issued by a company subject to such terms and conditions as may be prescribed.
Where debentures are issued by a company, the company 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 utilised by the company except for the redemption of debentures.
No company shall issue a prospectus or make an offer or invitation to the public or to its members exceeding five hundred for the subscription of its debentures, unless the company has, before such issue or offer, appointed one or more debenture trustees and the conditions governing the appointment of such trustees shall be such as may be prescribed.
An issue of debenture for more than five hundred members or any number of public (this is subject to clarification from government) without creating a debenture trust is prohibited.
A debenture trustee shall take steps to protect the interests of the debenture holders and redress their grievances.
Any provision of trust deed or contract secured by trust deed, exempting a trustee or indemnifying him against any liability for breach of trust shall be void. However, trustee may be indemnified where he show the degree of care and due diligence required of him as trustee.
The liability of the debenture trustee shall be subject to such exemptions as may be agreed upon by a majority of debenture-holders holding not less than three – fourths in value of the total debentures at a meeting held for the purpose.
A company shall pay interest and redeem the debentures in accordance with the terms and conditions of their issue.
Where at any time the debenture trustee comes to a conclusion that the assets of the company are insufficient or are likely to become insufficient to discharge the principal amount as and
when it becomes due, the debenture trustee may file a petition before the Tribunal. The Tribunal may, after hearing the company and any other person interested in the matter, by order, impose such restrictions on the incurring of any further liabilities by the company as the Tribunal may consider necessary in the interests of the debenture-holders.
If any default is made in complying with the order of the Tribunal under this section, every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than two lakh rupees but which may extend to five lakh rupees, or with both.
A contract with the company to take up and pay for any debentures of the company may be enforced by a decree for specific performance.
The Central Government may prescribe the procedure, for securing the issue of debentures, the form of debenture trust deed, the procedure for the debenture-holders to inspect the trust deed and to obtain copies thereof, quantum of debenture redemption reserve required to be created and such other matters.
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