Debenture w.e.f. 9th February 2018


The Companies (Amendment) Act, 2017 has amended the definition of Debenture with an interesting and confusing way. We will discuss it hereunder.

Before this amendment, Section 2(30) of the Companies Act, 2013 defines debenture as under:

“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.”

The Companies (Amendment) Act, 2017 inserted following proviso to the definition:

“Provided that—
(a) the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; and
(b) such other instrument, as may be prescribed by the Central Government in consultation with Reserve Bank of India, issued by a company,
shall not be treated as debenture;”

Experts interpret the earlier definition of its wide and logical interpretation to include promissory notes, commercial papers or any acknowledgement of a debt to be a debenture. It often jokingly argued whether company deposits are also debt. Present proposal seeks to clarify this position and exclude certain money market instruments from a definition of debentures.

A.     Instruments in Chapter III-D

Chapter III-D of the Reserve Bank of India Act, 1934 refers derivatives, money market instruments, Repo, reverse repo, and securities. Definitions of these terms may vary from chapter to chapter of the Reserve Bank of India Act, 1934.

Derivatives

Derivative means an instrument, to be settled at a future date, whose value is derived from change in interest rate, foreign exchange rate, credit rating or credit index, price of securities (also called “underlying”), or a combination of more than one of them.

Derivatives includes interest rate swaps, forward rate agreements, foreign currency swaps, foreign currency-rupee swaps, foreign currency options, foreign currency rupee options or such other instruments as may be specified by the Bank from time to time.

Money market instruments

Money market instruments include call or notice money, term money, repo, reverse repo, certificate of deposit, commercial usance bill, commercial paper and such other debt instrument of original or initial maturity up to one year as the Bank may specify from time to time.

Repo

Repo means an instrument for borrowing funds by selling securities with an agreement to repurchase the securities on a mutually agreed future date at an agreed price which includes interest for the funds borrowed.

Reverse repo

Reverse repo means an instrument for lending funds by purchasing securities with an agreement to resell the securities on a mutually agreed future date at an agreed price which includes interest for the funds lent.

Securities

Securities means securities of the Central Government or a State Government or such securities of a local authority as may be specified in this behalf by the Central Government and, for the purposes of “repo” or “reverse repo”, include corporate bonds and debentures.

This definition of securities refers to government securities and includes corporate bond and debentures.

B.     Such other instruments

The Central Government may in consultation with Reserve Bank of India prescribe any other instrument issued by a company.

This is an interesting roundabout. Reserve Bank of India may specify any other instrument under Chapter III-D of the Reserve Bank of India Act, 1934. The Reserve Bank of India may exercise this power even without any consultation with Central Government. Same time, clause (b) of newly inserted proviso empowers Central Government to prescribe any other instrument in consultation with the Reserve Bank of India. This results in repetition of same powers to two different regulators.

Interesting observations

  1. Now, Debentures do not include debentures. [Proviso to Section 2(30) of the Companies Act, 2013 read with Section 45U(e) of the Reserve Bank of India Act, 1934.
  2. Earlier, debentures include money market instruments, derivatives and other securities which are not debentures in market parlance.
  3. Both, Reserve Bank of India and Central Government have powers to exclude an instrument from the definition of the debenture.
  4. The intention of legislature seems not to exclude all instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934 but most of them.
  5. It seems, draftsman took shortcut to exclude certain instruments referred to in Chapter III-D and created a mess.
  6. The intention seems to exclude those instruments which need to be regulated by Reserve Bank of India being money market or secondary market instruments involving banking transactions.
  7. The proviso to Section 45W(1) of the Reserve Bank of India Act, 1934 gives a more fair idea to the true intention of the Parliament:
    “the directions issued under this subsection shall not relate to the procedure for execution or settlement of the trades in respect of the transactions mentioned therein, on the Stock Exchanges recognised under section 4 of the Securities Contracts (Regulation) Act, 1956(42 of 1956).”
  8. Sub-rule (9), (10) and (11) of Rules 18 Inserted by the Notification Companies (Share Capital and Debentures) Amendment Rules, 2015 Dated 18th March 2015 gives another fair idea of the intention of the government.

Let us prepare for confusing rules and circulars as another round of damage control exercise until the next amendment to the Companies Act, 2013.

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