INTRODUCTION

Debenture is essentially a Corporate debt instrument acknowledging money lent and

guaranteeing repayment with interest and creating security on the assets of the company for due
performance of its obligation.
Debenture includes debenture stock, bonds and any other securities of a company whether
constituting a charge on the assets of a company or not as defined in the Companies Act. This is
an inclusive definition and amounts to borrowing of monies from the holders of debentures on
such terms and conditions subject to which the debentures have been issued. Basically it is a
document or certificate signed by the authorized officers of a company acknowledging money
lent and guaranteeing repayment with interest and creating security on the assets of the company
for due performance of its obligation. This is a debt instrument and is the commonest method of
raising loan capital, as part of project financing. Debentures may be redeemable as envisaged in
the Companies Act or mandatorily convertible wholly into the equity shares of a company as
envisaged under FEMA. While the articles of a company should contain an enabling provision
for issue of debentures and creation of security therefor by the Board, the quantum of such issue
should be adequately covered by a borrowing resolution of its shareholders under section 293(l)
(d) of the Companies Act,1956 (the Act).
MEANING OF DEBENTURES
It is to be noted that the term debenture is derived from the Latin term debere which means
to borrow. A company may find it difficult to borrow large sum of money from a single lender,
therefore it may split it into several units and offer the public to purchase debentures. A
debenture is thus a certificate of loan issued by a company to the holder of the debenture. The
person who is holding debenture is called debentureholder. It is undoubtedly a kind of security.
The term debenture has been defined in section 2(30) of the Companies Act, 2013 which says,
debenture includes debenture stock, bonds and any other securities of a company whether
constituting a charge on the companys assets or not.

According to Topham, Debenture is a document given by a company as an evidence of a debt to

the holder usually arising out of a loan and most commonly secured by a charge.1
According to Prof. Palmer, debenture is an instrument under seal evidencing a debt, the essence
of it being the admission of indebtness.
In Laxman Bharamji v. Emperor,2 the Bombay High Court observed that debentures normally
indicate the security against the loan taken by the company and contain the conditions of
repayment, date, rate of interest payable to the holder. They may even create a charge on the
companys property, but it is not always necessarily so. Briefly speaking, debentures are the
acknowledgement of debt, the promise to return it.
In United Dominion Trust Ltd. v. Kirkwood3, receipt or a certificate for a deposit made with a
company (other than a bank) when the deposit was repayable at a fixed period after it was made,
was held to be debenture.

CHARACTERISTICS OF DEBENTURES

A debenture is usually in the form of a certificate (like a share certificate) issued under

the common seal of the company.

The certificate of the company is an acknowledgement by the company for the

indebtedness to a holder.
A debenture usually provides for the payment of a specified sum at a specified date.
A company may issue a perpetual debenture wherein no specific date of repayment may
be stated. Further4 perpetual debentures are not invalid simply because they are made

1 Tophams Company law (12th Ed.), 168.

2 AIR 1946 Bom. 18
3 (1966) 1 All ER 968.
4 Section 71 of the Companies Act provides that
2

irredeemable or redeemable only on the happenings of a contingency, however remote or

on the expiration of a period however long.5

A debenture usually provides for payment of interest until the principal sum is paid back.
A company shall not issue any debenture carrying voting rights.6
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.7

Debentures are generally issued in series but a single debenture may be issued in case of

a sole-lender of the company.8

Debenture generally creates a charge on the undertaking of the company or on some of its
assets. This is, however, not an essential characteristic and a debenture creating no charge

is also perfectly legal.9

The holders of the debentures is the creditor of the company not its member.

KINDS OF DEBENTURE

Redeemable and
Irredeemable
Debenturs

Secured And
Unsecured
Debentures

5 Knightsbridge Estates Ltd. v. Byrne (1940)

6 Section 71 (2)
7 Section 71 (12)
8 Robson v. Smith (1895)
9 Seva Singh v. Mukha Singh AIR 1936
3

Convertible
Debentures

1. Redeemable Debentures: - From the point of view of redeemability, debentures may

either be redeemable or they may be irredeemable. Debentures are generally redeemable,
that is to say, they are issued on the terms that the company is bound to repay the amount of
debentures, either at a fixed date, or upon demand, or after notice, or under a system of
periodical drawings. Redeemable debentures may be re-issued unless the articles prohibit
their re-issue or there is a resolution showing the intention of the company to cancel the
redeemed debentures. The person who is re-issuing the debentures shall continue to have
the same rights and priorities as he was enjoying prior to re-issue.10
2. Secured and Unsecured/Naked Debentures: - Where debentures are secured by a
mortgage or a change on the property of the company, they are called secured debentures.
Where they are not secured by any mortgage or charge on any property of the company,
they are said to be naked or unsecured.
3. Convertible Debentures: - Convertible debentures are those in which an option is given to
the debentureholders to exchange a part or whole of their debentures for shares in the
company under certain conditions and limitations imposed regarding the period during
which the option may be exercised. This enables the investor to change his position from a
debentureholders to a shareholder when he finds that company is in a sound position
financially and begins to make profit.

ISSUE OF DEBENTURES
The power to issue debentures is usually set out in the memorandum of the company. The
debentures can be issued in the same manner as shares in accompany. But unlike shares they can
be issued at a discount if the articles so authorize, the reason being that they do not form a part of
the capital of the company. Debentures can also be issued at a premium. The interest payable on
debentures id debt and can therefore be paid out of capital.
The form of application of debentures must be accompanied by a copy of memorandum
containing the salient features of the prospectus of the company. The document by which the
10 Gower : Modern Company Law (3rd Ed.), 343.
4

offer is made to the public, shall for purposes be deemed to be a prospectus of the company. 11
The copy of the prospectus sent for registration must be signed by every director or proposed
director and also for offerers.
Where the company has not issued any prospectus, an allotment of debentures cannot be made
unless a statement in lieu of prospectus is filed with the registrar of companies at least three days
before the first allotment.12

LIABILITY OF COMPANY TO CREATE SECURITY AND DEBENTURE

REDEMPTION RESERVE
Where a company issues debentures after the commencement of this Act, it shall create a
debenture redemption reserve for the redemption of such debentures, to which adequate amount
shall be credited, from out of its profit every year until such debentures are redeemed.
Where the company fails to redeem the debentures on the date of maturity, the Tribunal may, on
the application of any or all the debenture holders, after hearing the parties concerned, direct the
company to redeem debentures forthwith along with the interest due thereon.
If default is made complying with the order of the Tribunal, the officer of the company who is in
default shall be punishable with imprisonment which may extent to three years and shall also be
liable to a fine of not less than two lakh rupees which may extend to five lakh rupees, or with
both.13

DEBENTURE TRUSTEE
Section 71 (5) provides the appointment of debenture trustee and enumerates the duties of such
trustees. A person holding shares beneficially in the issuer company or beneficially entitled to
11 Section 25 of The Companies Act, 2013.
12 Section 39 of companies Act, 2013
13 Section 71(11)
5

receive moneys from that company and has provided any guarantee in respect of principal debts
secured by the debentures or interest there on cannot be appointed as a trustee, as specified in the
Act. SEBI (Debenture Trustee) Regulations, 1993 additionally provide that no entity shall be
entitled to act as debenture trustee unless at is either a scheduled bank carrying on commercial
activity or a public financial institution within the meaning of section 4A of the Act or an
insurance company, or a body corporate. It is also necessary that such an entity should have
capital adequacy of net worth of one crore of rupees and have been licensed by SEBI to act as a
debenture trustee.

FUNCTIONAL ROLE OF DEBENTURE TRUSTEE

The Debenture Trustee is an intermediary between the issuer of debentures and the holders of
debentures. Accordingly the main responsibility of debenture trustee is to protect the interest of
holders of debentures including creation of security by the company issuing the debentures and
to redress their grievances.
A. Companies Act
Under the Companies Act, 1956 the debenture trustee has the following responsibilities:
1) To ensure that the assets of the company issuing debentures and each of the guarantors are
sufficient to discharge the principal amount at all times.
2) To satisfy that the prospectus or the letter of offer does not contain any matter which is
inconsistent with the terms of debentures or with the trust deed.
3) To ensure that the company does not commit any breach of covenants and provisions of the
trust deed.
4) To take such reasonable steps to remedy any breach of the covenants of the trust deed or the
terms of issue of the debentures.
5) To take steps to call a meeting of holders of debentures as and when such meeting is required
to be held.
Needless to say that the aforesaid responsibilities envisaged in Section 117B(3) of the Act are
intended to protect the interest of the debenture holders. One of the aforesaid requirements relate
to adequacy of security so that in the event of failure of issuer of security to redeem the
debentures,(which is an event of default) the Debenture Trustee should enforce the security and
pay off the debenture holders by disposing off the secured assets.
6

B. SEBI Regulations
Regulation 15 of SEBI (Debenture Trustees) Regulations, 1993 prescribes the following duties of
the Debenture Trustee:
1)
2)
3)
4)

Call for periodical reports from the body corporate, i.e., issuer of debentures.
Take possession of trust property in accordance with the provisions of the trust deed.
Enforce security in the interest of the debenture holders.
Ensure on a continuous basis that the property charged to the debenture is available and
adequate at all times to discharge the interest and principal amount payable in respect of the
debentures and that such property is free from any other encumbrances save and except

those which are specifically agreed with the debenture trustee.

5) Exercise due diligence to ensure compliance by the body corporate with the provisions of
the Companies Act, the listing agreement of the stock exchange or the trust deed.
6) To take appropriate measures for protecting the interest of the debenture holders as soon as
any breach of the trust deed or law comes to his notice.
7) To ascertain that the debentures have been converted or redeemed in accordance with the
provisions and conditions under which they are offered to the debenture holders.
8) Inform the Board immediately of any breach of trust deed or provision of any law.
9) Appoint a nominee director on the board of the body corporate in the event of: Two consecutive defaults in payment of interest to the debenture holders; or
default in creation of security for debentures, or
default in redemption of debentures.
10) No debenture trustee shall relinquish its assignments as debenture trustee in respect of the
debenture issue of anybody corporate, unless and until another debenture trustee is
appointed in its place by the body corporate.
Rule 17A of the aforesaid Regulation provides that every debenture trustee should appoint a
compliance officer and he shall be responsible for monitoring the compliance of the Act, rules
and regulations, notifications, etc., issued by the Board or the Central Government for redressal
of investors grievances.
Thus a Debenture Trustee occupies a pivotal position of trust and confidence between the
company which issues debentures and the debenture holders who subscribe for the debentures.

GUIDELINES FOR ISSUE OF DEBENTURES:

The Government, on 17 April 1982, have issued the following, revised guidelines for issue of
debentures to the public by public limited listed companies in supersession of the guidelines
issued earlier on 27 October 1980:14
1. Applicability: The guidelines will apply to issues of secured convertible as well as nonconvertible debentures by public listed companies.
2. Objects of issue: The object of the issue can be either to raise long-term funds for the
financing of any expansion or diversification project or to augment the long-term resources
of the company for working capital requirements.
3. Quantum of issue: The amount of issue debentures in the case of working capital
requirements shall not exceed 20 per cent of the gross current assets, loans and advances. The
amount of issue of debentures for project financing will be considered on the basis of the
approvals of the scheme of finance by the financial institutions/ government under the
provisions of the M.R.T.P. Act, etc.
4. Debt-equity ratio: The debt-equity ratio including the proposed debenture issue shall not
normally exceed 2:1. For this purpose Debt will mean all term loans, debentures and
bonds with an initial maturity period of five years or more, including interest accrued
thereon. It also includes all deferred payment liabilities but it does not include short-term
bank borrowings and advances, unsecured deposits or loans from the public, shareholders
and employees, and unsecured loans or deposits from others. It should also include the
proposed debenture issue. Equity will mean paid-up share capital including preference
capital and free reserves.
Notes:
The computations under guidelines 3 and 4 mentioned above will be based on the
latest available audited balance sheet of the company.
A relaxation in the norm of debt-equity ratio of 2 : 1 will be considered favorably for
capital intensive projects such as fertilizers, petro-chemicals, cement, paper, shipping,
etc

14 Vide Ministry of Finance, Department of Company Affairs, Office of The Controller of Capital Issues
Vide Notification No. S-11(9)-CC(II) 84 Dated 15th September, 1984
8

5. .Interest rate: In the case of convertible debentures the rate of interest shall not exceed 13.5
per cent per annum. In the case of non-convertible debentures the rate of interest shall not
exceed 15 per cent per annum. 15
6. Period of redemption: The debentures shall not be redeemable before the expiry of a period
of seven years.
7. Price at the time of redemption: A premium upto 5 per cent of the face value can be
allowed at the time of redemption in the case of non-convertible debentures only.
8. The face value of the debentures will ordinarily be Rs 100 each.
9. The debentures shall be listed on the stock exchange,
10. Only secured debentures will be permitted for issue to the public.
11. The issue of debentures shall be underwritten. A relaxation is permitted in this regard if the
Controller of Capital Issues is otherwise satisfied that the issue need not be underwritten.
12. The shares of the company proposing to issue the debentures must be listed in one or more
stock exchanges and the market quotation of its equity shares must have been at or above par
value during the six months prior to the date of application for issue of debentures.

PROCEDURE FOR ISSUE OF DEBENTURES:

The procedure for the issue of debentures is as follows:
1. First of all a Board meeting is convened at which the decision to issue debentures, the
number and terms of issue and the rate of interest is taken by means of a resolution to that
effect. However, where a companys shares are listed on the stock exchange, the listing
agreement stipulates that shareholders approval should be obtained for the offer of
debentures to the public and therefore this approval is also to be obtained.
2. Then the consent of the Controller of Capital Issues is obtained if the issue exceeds Rs 50
lakhs. If the moneys to be borrowed, together with the moneys already borrowed by the
company (apart from temporary loans) exceed the aggregate of the paid up capital of the
company and its free reserves, permission of the General Body is also obtained, by ordinary
resolution, for the proposed issue.

15 These rates are subject to change by Department of Finance and Economic Affairs (Controller of
Capital Issues notifications)
9

3. In the case of issue of listed debentures to the public by public limited companies, the
guidelines prescribed by the Government in that regard (discussed under the preceding
heading) must be fully complied
4. In case the debenture to be issued are bearers ones, it will be necessary to obtain permission
from the Reserve Bank of India as well.
5. In case the debentures are issued under a Trust Deed, necessary consent of trustees is
obtained and a draft of Trust Deed is prepared. A draft of prospectus and the Debenture Bond
is also prepared.
6. After the completion of these formalities, the Board approves the drafts of prospectus, Trust
Deed and debenture bonds and directs the secretary to arrange for their printing.
7. The Trust Deed is then executed with the trustees for debenture holders.
8. The particulars of the charges created on the issue are to be filed with the Registrar of
Companies within 30 days of the execution of the Trust Deed for registration and a
Certificate of Registration is obtained. This Certificate is to be endorsed on every Debenture
Certificate. All particulars are also entered in the Registrar of Charges maintained by the
company at its registered office.
9. Where it is proposed to enlist the debentures in any stock exchange approval of the
concerned stock exchange is to be obtained.
10. A copy of the prospectus is then filed with the Registrar and the Prospectus is issued to the
public. In case the debentures are to be issued privately (without making a public offer) a
statement in lieu of prospectus is to be filed with the Registrar at least three days before the
first allotment of debentures.
11. After the allotment, the particulars about each debenture are entered in the Registrar of
Debenture-holders and Debenture Certificates are prepared which are issued to the Allottees
in due course.

10

CONCLUSION
Issue of Debentures, whether redeemable or convertible involves compliance with the
substantive and procedural aspects of law. Documentation is equally important. The benefit of
raising loan capital lies in the fact that it does not disturb equity structure of the company and
consequently the existing management. However, the success of a debenture issue be it private or
public issue depends, to a large extent, on the goodwill and rapport built up by the company with
the investing public. Another aspect o f the matter is the protection of interest of debenture
holders. This is sought to be achieved by an independent Debenture Trustee who is required to be
appointed by listed companies in regard to public issue or further issue of capital as the number
of debenture holders are considerably large Creation of DRR which is statutory obligation is
intended to provide liquid resource built out of profits of a company for redemption of
debentures.

11