A bond from the Dutch East India Company, dating from 7 November 1623, for the amount of 2,400 florins. (Photo credit: Wikipedia)
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.
Please note: I welcome your comments and feedback. This blog post is not a professional advice. Readers may share this post on social media by using buttons given here.
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AishMGhrana 
Whether Secured debentures may be issued by a company by giving the Security as any immovable property in its group companies/subisidiaries/undertakings against the Redeemable Secured NCD’s of the parent company?
In other words, whether as per Companies (Companies (Share Capital and Debentures) Rules, 2014), charge on any immmovable properties like land in the subsidiary company or pledge of shares of the subsidiary company is allowed for the issuance of Redeemable Secured NCD’s of the parent company?
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I will post related provisions in near future after study. Please check updates.
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What is your call on the above query?
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According to Rule 18, an issue of debentures shall be secured by the creation of a charge, on the properties or assets of the company, having a value which is sufficient for the due repayment of the amount of debentures and interest thereon.
Accordingly, Assets of the subsidiary may not be charged.
Please also refer to my post dated 2nd June 2014.
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Thanks for your clarification Mr Gahrana. In furtherance to your reply, i would like to further clarify the following:
For example: ABC Ltd. being wholly owned subsidiary of XYZ Ltd.,on consolidating the accounts as per Schedule 3 of Company’s Act, 2013 format for consolidating the accounts for parent company, all the assets and liabilities of the subsidiary companies are to be aggregated with the assets and liabilities of the holding company.
Can we say that the requirement of tendering security only of its “own properties or assets” by the company as required under Rule 18 (1) (b) of Companies (Share Capital and Debentures) Rules, 2014 can be interpreted as the properties and assets of its wholly owned subsidiary companies also?
Further, as per Rule 18 (1) (d), the security for the debentures by way of a charge or mortgage shall be created in favour of 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.
Hence, in other words, can we say that Rule 18(1)(d)(ii) mandates creation of security in favour of debenture trustee on any specific immovable property without condition of ownership attached thereto?
Kindly clarify in the light of the above scenario.
Regards
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What is purpose of security? Trustees may realize some value in case of default.
Irrespective of holding subsidiary relationship, companies are independent legal person. A person cannot create charge or mortgage on property of another. Consolidation of Account is requirement of accounting or governance not of natural law.
Further, Rule 18(1)(d) use term “specific movable property” and “specific immovable property”. What are these ‘specific properties”?
When we crate security, a charge is required under Chapter VI of the Companies Act, 2013. Are the properties, on which charge may be created, “specified properties”?
Please, you and other readers may please enlighten me.
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Thanks for the revert.
Just wanted to be clear with the practical vis-a-vis the legal/regulatory fight w.r.t to this new provision in Companies act, 2013.
In furtherance to your reply, i wanted to be clarified of a very small practical aspect that comes in my mind when dealing with Holding company (“HC”) and its wholly owned subsidiaries (“WOS”).
Please appreciate that the shareholding in a WOS (needless to say to the extent of 100%) is nothing but an investment for its HC ( and hence shown in the asset side of the balance sheet for HC). Meaning thereby the shareholders of WOS are nobody but the HC itself. Hence, in order to create any charge or lien or mortgage on any immovable or movable property in WOS by HC, the shareholder (not trustees if the incorporation happened as “Company”) will not have any problems being the “SAME”.
i understand that both are separate legal entities but just wanted to understand that which provision of law/statue will restrict or refrain me from creating any charge on the assets of WOS by HC in case of securing an issue of “Secured NCD’s” (for example).
Hope you understand the intent.
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Provision related Secured Debenture read with Provisions related with Charge read with the Transfer of Property Act read with Section 9 of the Companies Act, 2013 Read with “Common Law”.
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Thanks for the reply.
I still requests you to think a bit more on my last query and see if you can feel the intent.
See Mr Gahrana, the idea to see whether the same can be argued to be be eligible if we can interpret two or more laws at one time for the ease of our clients.
Many a times our clients have assets (Land for example) in their subsidiary companies balance sheet but the requirement of funds arose at the holding company level apart from Corporate Guarantee or Bank guarantee.
So how to tackle the problem is the main concern of my posts/time here.
I hope the conversation is more than proving oneself correct.
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I am not here to prove myself or anyone else correct.
Final Interpretation always lies with Judiciary.
I was suggesting to read all these points together to find out interpretation.
As blogger, my hobby/duty to provide general information and interpretation to all readers.
I here open your comments to all users/readers to discuss this poser.
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Are debentures covered under deposit rules?
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Clause (c) of Rule 2 of the Companies (Acceptance of Deposits) Rules, 2014 says deposits does not include:
“any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking pari passu with the first charge on any assets referred to in Schedule III of the Act excluding intangible assets of the company or bonds or debentures compulsorily convertible into shares of the company within five years;
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Debentures can be issued at discount or not
Please reply on email goswamica@gmail.com
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Yes, the Act and Rules do not prohibit issue of debenture at discount. Section 53 prohibit issue of shares at a discount.
I may not reply comments of readers by e-mail.
Readers may please use Notify me of follow – comments via email given below the comment box while writing a comment.
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Any expressed provision?
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What is the procedure if a Company wants to issue optionally fully convertible debentures in the form of deposits?
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What will be the procedure to issue unsecured optionally convertible debentures ??
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Whether the expression ” any instrument evidencing a debt ” used in Section 2(30) of Companies act 2013 include a loan agreement ?
Reason : I put this query because definition of debenture in 1956 act used the term “securities ” which narrowed the ambit viz a viz definition under the new act.
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Yes, it appear and correctly appear.
This expression may also include treasury Bills, Promissory notes, and many things.
Hope, there may be some “Removal of Difficulty Order” on this.
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what will be the treatment under new Act of CA 2013??
A pvt company had raised unsecured debentures in earlier years suppose 2010 and 2011 and not created any charge against this.
whether it will be treated as deposit under new act??
if yes then how and if no then how??
please throw some light.
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Sir,
Can please tell me the procedure for issue of compulsary convertable debentures by pvt limited company and required documents to be filed with roc
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Sir…is there any format for debenture certificate under the provisions of companies act, 2013
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No, you may use SH – 1 with suitable modifications.
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What provision/case law provides for this ?
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For What?
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Sir,
Kindly mention the Section No. or Rule No. for issuance of debenture certificate within 6 months of allotment.
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Please Refer to Section 56(4)(d).
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Sir,
Can you please help me with the procedure for issue of compulsarily convertible debentures by pvt limited company and required documents to be filed with ROC?
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please refer relevant posts listed here https://aishmghrana.me/companies-act-2013/chapter-iv/
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Whether an individual (being even a professional like a Chartered Accountant, Company Secretary or Lawyer) can be appointed as a Debenture Trustee by a company for NCDs under private placement or through public issue?
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Yes.
For detail further, please refer https://aishmghrana.me/2014/06/03/debenture-trust-and-trustees/
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Yes, For More details please refer https://aishmghrana.me/2014/06/03/debenture-trust-and-trustees/
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Sir,
Can please tell me the procedure for issue of compulsary convertable debentures by pvt limited company and required documents to be filed with roc
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can indian company issue debentures to indian individual or resident ? if yeas type of debentures which can be issued and what is the procedure of issue please rply ?
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