A Company may raise a debt capital, which is not a nature of Deposits, by issue of debentures under Section 71 of the Companies Act 2013 as we discussed earlier here.
Debenture under the Companies Act 2013 is wide and inclusive terms and considered to Promissory Notes also. This is play of mind, imagination and requirement to design a debenture within boundaries of law.
The Definition of Debenture under Section 2(30) suggest unsecured debentures also but Rule 18 of the Companies (Share Capital and Debentures) Rules 2014 suggest procedure for secured Debentures only leaving unsecured debenture either out of question or out of legal checks. Unsecured Debentures may still be issue within parameters of Section 71.
A company shall comply following conditions to issue secured debentures, namely:-
(a) The date of redemption of a secured debenture shall not exceed ten years from the date of issue.
A company engaged in the setting up of infrastructure projects may issue secured debentures for a period exceeding ten years but not exceeding thirty years. According to the amendment rules w.e.f. 18th June 2014 the following classes of companies may issue secured debentures for a period exceeding ten years but not exceeding thirty 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 of (b) direction 3 of Infrastructure Debt Fund Non-Banking Financial Companies (Reserve Bank) Directions, 2011
(b) 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;
(c) The company shall appoint a debenture trustee before the issue of prospectus or letter of offer for subscription of its debentures. The Company Shall, not later than sixty days after the allotment of the debentures, execute a debenture trust deed to protect the interest of the debenture holders; and
I assume there is intention to appoint “a debenture trust” not “a debenture trustee” as further reading suggests more than one trustee.
(d) The security for the debentures by way of a charge or mortgage shall be created in favour of the 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.
There is effectively a long gap between appointment of debenture trustee and execute a debenture trust deed.
We will debenture trust and trustees in next post.
Meeting of Debenture Holders:
The meeting of all the debenture holders shall be convened by the debenture trustee on-
(a) Requisition in writing signed by debenture holders holding at least one-tenth in value of the debentures for the time being outstanding;
(b) The happening of any event, which constitutes a breach, default or which in the opinion of the debenture trustees affects the interest of the debenture holders.
Public Offer of Debenture:
The provisions of sub-rules (2) to (5) of rule 18 shall not be applicable to the public offer of debentures. These Sub – rules deal with Debenture Trustee, Duties of Debenture Trustees, Meeting of Debenture – Holders and Trust Deed.
Debenture Redemption Reserve:
The company shall create a Debenture Redemption Reserve for the purpose of redemption of debentures, in accordance with the conditions given below-
(a) The Debenture Redemption Reserve shall be created out of the profits of the company available for payment of dividend;
(b) The company shall create Debenture Redemption Reserve in accordance with following conditions:
(i) No DRR is required for debentures issued by All India Financial Institutions (AIFIs) regulated by Reserve Bank of India and Banking Companies for both public as well as privately placed debentures. For other Financial Institutions (FIs) within the meaning of clause (72) of section 2 of the Companies Act, 2013, DRR will be as applicable to NBFCs registered with RBI.
(ii) For NBFCs registered with the RBI under Section 45-IA of the RBI (Amendment) Act, 1997, “and for Housing Finance Companies registered with the National Housing Bank ‘the adequacy’ of DRR will be 25% of the value of debentures issued through public issue as per present SEBI (Issue and Listing of Debt Securities) Regulations, 2008, and no DRR is required in the case of privately placed debentures.
(iii) For other companies including manufacturing and infrastructure companies, the adequacy of DRR will be 25% of the value of debentures issued through public issue as per present SEBI (Issue and Listing of Debt Securities), Regulations 2008 and also 25% DRR is required in the case of privately placed debentures by listed companies. For unlisted companies issuing debentures on private placement basis, the DRR will be 25% of the value of debentures.
(c) Every company required to create Debenture Redemption Reserve shall on or before the 30th day of April in each year, invest or deposit, as the case may be, a sum which shall not be less than fifteen percent, of the amount of its debentures maturing during the year ending on the 31st day of March of the next year, in any one or more of the following methods, namely:-
(i) In deposits with any scheduled bank, free from any charge or lien;
(ii) In unencumbered securities of the Central Government or of any State Government;
(iii) In unencumbered securities mentioned in sub-clauses (a) to (d) and (ee) of section 20 of the Indian Trusts Act, 1882;
(iv) In unencumbered bonds issued by any other company which is notified under sub-clause (f) of section 20 of the Indian Trusts Act, 1882;
(v) the amount invested or deposited as above shall not be used for any purpose other than for redemption of debentures maturing during the year referred above: Provided that the amount remaining invested or deposited, as the case may be, shall not at any time fall below fifteen percent of the amount of the debentures maturing during the year ending on the 31st day of March of that year;
(d) in case of partly convertible debentures, Debenture Redemption Reserve shall be created in respect of non-convertible portion of debenture issue in accordance with this sub-rule.
(e) the amount credited to the Debenture Redemption Reserve shall not be utilised by the company except for the purpose of redemption of debentures.
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