178 Vipul’sTM Merchant Banking

UNIT – IV

Chapter 7

Issue of Debentures

7.1 Introduction and Meaning of Debt Market

7.2 Role of Debt Market
7.3 Classification of the Debt Market in India
7.4 Debentures
7.5 Types of Debentures
7.6 Issue of Debentures
7.7 Conditions for Issue of Debentures
7.8 Procedure for Issue of Debentures
7.9 Current Scenario
7.10 Case Study on Sahara India
7.11 Questions for Self-Practice
Issue of Debentures 179

7.1 INTRODUCTION AND MEANING OF DEBT

MARKET:
Debt Market is the financial market where investors buy and
sell debt securities, mostly in the form of bonds. It is a market
where fixed income securities of various types and features are
issued and traded. Debt market are therefore, markets for fixed
income securities issued by the central and state government,
municipal corporations, government bodies and commercial
entities such as financial institutions, banks public sector units and
public limited companies.
Debt market is an important source of funds, especially in a
developing economy like India. Indian debt market is one of the
largest in Asia. The most distinguished feature of the Indian debt
market is that returns are fixed. This means, returns are almost
Risk Free. The fixed return on the bond is often termed as the
Coupon Rate or the Interest Rate. Therefore, the buyer is giving
the seller a loan at a fixed interest rate, which equals to coupon
rate.

7.2 ROLE OF DEBT MARKET:

The debt market assumes great importance for the following
reason:
(1) Debt markets provide an assured rate of return to the
investors, particularly when real and financial sector are all
geared for change;
180 Vipul’sTM Merchant Banking

(2) Debt markets can signal about the long run prospects of the
economy, through a constellation of growth-inflation-interest
rate expectation;
(3) A shift of focus from an automatic accommodation of fiscal
deficits would mean that both state and central governments
would have to rely on debt market;
(4) The restructuring of public sector enterprises would involve
greater access to capital markets and with less equity dilution
implies that they will have to depend on the bond market, the
equity market in India can be said to have become
sophisticated and vibrant during the last decade, although a
number of regulatory pressures still cripple its growth.
However, the bond segment is still narrow and lacking
dynamism. This is the sharp contrast with the bond markets
in the world over where these are a prominent segment and
serve as the base to all other markets.

7.3 CLASSIFICATION OF THE DEBT MARKET IN

INDIA:
The Indian Debt Market can be classified into 2 categories,
namely Government Securities Market (G-Sec Market) and Bond
Market:
(1) Government Securities Market (G-Sec Market): A
government securities market is a bond or other type of debt
obligation that is issued by a government with a promise of
repayment upon the securities maturity date. G-Sec are
usually considered low risk investments because they are
backed by the taxing power of a government. They are
Issue of Debentures 181

usually issued for different reasons. The primary reason that

most government securities are issued is to raise funds for
government expenditures. This is a tradable instrument
issued by the Central Government or the State Government.
(2) Bond Market: A bond market is a debt obligation that is
issued by a company or government. It consists of financial
institutions bonds, corporate bonds, public sector units bonds
and debentures. When a company or a government issues a
bond, it borrows money from the bond holders; it then uses
the money to invest in its operations. In exchange, the bond
holders, receives the principal amount back on a maturity
date stated in the Debenture.

The instruments traded can be classified into the following

segments based on the characteristics of the identity of the
issuer of these securities:

Market Segment Issuer Instruments

Government Securities Central Government Zero, Coupon Bonds,

Coupon Bearing
Bonds, Treasure Bills,
STRIPS

State Governments Coupons Bearing

Bonds.

Public Sector Bonds Government Agencies/ Govt. Guaranteed

Statutory Bodies Bonds, Debentures.

Public Sector Units PSU Bonds,

Debentures,
182 Vipul’sTM Merchant Banking

Commercial Paper.

Private Sector Bonds Corporate Debentures, Bonds,

Commercial Paper,
Floating Rate Bonds,
Zero Coupon Bonds,
Inter-Corporate
Deposits.

Banks Certificate of
Deposits, Debentures,
Bonds

Financial Institutions Certificates of

Deposits, Bonds.

7.4 DEBENTURES:
The term Debenture is derived from the Latin word ‘Debere’
which means ‘to owe a debt’. A debenture is one of the capital
market instruments which in used to raise medium or long term
funds from public. It is a debt instrument that acknowledges a
loan to the company and is executed under the common seal of
the company. Thus debenture is an instrument of credit issued by
a company to acknowledge its debt/loan to debenture holder upto
a certain sum of money under certain terms and conditions. The
debenture document, called Debenture Deed, contains provisions
as to payment of interest and the repayment of principal amount
and giving a charge on the assets of a company, which may give
security for the payment over some or all assets of the company.
As per Section 2 (12) of Companies Act 1956, “Debenture
includes debenture stock, bond and any other securities of the
Issue of Debentures 183

company whether constituting a charge on the company’s assets

or not”.
Debenture holder (investor) gets a fixed rate of interest. He
cannot vote in the company’s meetings. Generally, debentures are
secured and have a charger on the assets of the company.
Debentures may be secured or unsecured. In the American
terminology, only unsecured bonds are called as Debentures. But
in India, we have borrowed our terminology from Britain where
no such distinction is made between Debentures and Bonds.
7.4.1 Features of Debentures:
Debentures have the following features:
(1) Debentures holders of the company are the creditors of the
company and not owners.
(2) Capital raised by way of Debentures is required to be repaid
during the life time of the company at the time stipulated by
the company. Thus, it is not a source of permanent capital.
(3) Debenture holders are entitled to periodical payment of
interest at an agreed rate.
(4) Debentures are secured by charge on or mortgage of the
assets of the company.
(5) Debenture holders do not carry any voting rights.
(6) Debenture holders have the right to sue the company for any
unpaid dues.
(7) They can enforce the security by sale in case of default.
(8) Debenture holders can apply for winding up of the company
to safeguard their interest.
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7.4.2 Advantages and Disadvantages of

Debentures:
ADVANTAGES OF DEBENTURES:
Debentures offer a number of advantages both to the company
as well as investors.
Advantages to the Company:
(1) Debentures provide long term funds to a company.
(2) The rate of interest payable on debentures is usually lower
than the rate of dividend paid on shares.
(3) The interest on debentures is a tax deductible expense and
hence the effective cost of debentures is lower as compared to
ownership securities where dividend is not a tax deductible
expense.
(4) Debt financing does not result into dilution of control because
debenture holders do not have any voting rights.
(5) A company can trade on equity by mixing debentures in its
capital structure and thereby increase its earnings per share.
(6) Many companies prefer issue of debentures because of the
fixed rate of interest attached to them irrespective of the
changes in price levels.
Advantages to the Investors:
(1) Debentures provide a fixed, regular and stable source of
income to its investors.
(2) It is comparative a safer investment because debenture
holders have either a specific or a floating charge on the assets
of the company and enjoy the status of a superior creditor in
the event of liquidation of the company.
Issue of Debentures 185

(3) Many investors prefer debentures because of the definite

maturity period.
(4) A debenture is usually more liquid investment and an
investor can sell or mortgage his instrument to obtain loans
from financial institutions.
(5) The interest of debenture holders is protected by various
provisions of the debenture trust deed and the guidelines
issued by SEBI.
DISADVANTAGES OF DEBENTURES:
In spite of many advantages, debenture financing suffers from
certain limitations. The following are the disadvantages of
Debentures.
Disadvantages to the Company:
(1) The fixed interest charges and repayment of principal amount
on maturity are legal obligations of the company. These have
to be paid even when there are no profits. Hence, it is
permanent burden on the company. Defaults in these
payments, adversely affects the creditworthiness of the firm.
(2) Charge on the assets of the company usually restrict a
company from using this source of finance. A company
cannot raise further loans against the security of the assets
already mortgaged to debenture holders.
(3) Cost of raising finance through debentures is high because of
high stamp duty.
Disadvantages to the Investors:
186 Vipul’sTM Merchant Banking

(1) Debentures do not carry any voting rights and hence its
holders do not have any controlling power over the
management of the company.
(2) Debenture holders are merely creditors and not the owners of
the company.
(3) Interest on debentures is fully taxable while shareholders
may avoid tax by way of bonus shares in place of cash
dividend.
(4) The prices of debentures in the market fluctuate with the
changes in the interest rates.

7.5 TYPES OF DEBENTURES:

Types ofDebentures
OntheBasis of

Security Registration Redemtion Conversion Priority

Secured Registered Redeemable Convertible First

Debenture Second
Unsecured Bearer Irredeemable Non- Debenture
convertible

(1) Debentures on the basis of Registration:

(a) Registered Debentures: The debentures which are
payable to the registered debenture holders are called
‘Registered Debentures’. These debentures are not
transferable by mere delivery. The names of the holders
of these debentures with details of the number, value and
type of debenture held are recorded in the register of
debenture holders. Registered debentures are not
negotiable instruments. Transfer of such debentures
requires registration.
Issue of Debentures 187

(b) Bearer Debentures: Bearer Debentures are those which

are payable to the bearer. These debentures are
transferable by mere delivery. The register of debenture
holders does not have the names of the debenture holder
recorded. Hence, they are transferable by mere delivery.
Registration of transfer is not necessary. Bearer
Debentures are also called as ‘Unregistered Debentures’.
(2) Debentures on the basis of Security:
(a) Secured Debentures: The debentures, which are secured
fully or partly by a charge over the assets of the company
are called Secured Debentures. The charge maybe either
a fixed charge or a floating charge. The charge, when
created should be registered with the Registrar within 30
days of its creation.
(b) Unsecured Debentures: The debentures which are not
secured fully or partly by a charge over the assets of the
company are called Unsecured Debentures. They are also
called ‘Naked Debentures’. They are not mortgaged. The
general solvency of the company is the only security for
the holders. The debenture holders are treated as only
unsecured creditors. Issue of such debentures are not
much popular.
(3) Debentures on the basis of Redemption:
(a) Redeemable Debentures: The debentures which are
payable after a certain period as per the terms of their
issuer, are called redeemable Debentures. Sometimes,
they can be redeemed by the company on demand by the
holders or at the discretion of the company.
188 Vipul’sTM Merchant Banking

(b) Irredeemable Debentures: They are perpetual

debentures. The debentures, which are not repayable
during the life time of the company, are called
‘Irredeemable Debentures’. The company has no
obligation to make the payment of the principal of these
debentures during its life time.
(4) Debentures on the basis of Conversion:
(a) Convertible Debentures: The debentures which are
convertible into equity shares or preference shares at the
option of the holders after a certain period are called
‘Convertible Debentures’.
(b) Non-Convertible Debentures: The debentures which are
not convertible into equity or preference shares are called
‘Non-Convertible Debentures’.
(5) Debentures on the basis of Priority:
(a) First Debentures: These debentures are redeemed before
other debentures.
(b) Second Debentures: These debentures are redeemed
after the redemption of first debentures.

7.6 ISSUE OF DEBENTURES:

Debentures can be issued in 3 ways:
(1) Issued at Par: When the issue price of the debenture is
equal to its face value, the debenture is said to be issued at
par.
For ex.: a Rs. 100 debenture is issued at Rs. 100.
Issue of Debentures 189

(2) Issued at discount: The debenture is said to be issued at

discount when the issue price is below its nominal value.
For ex.: a Rs. 100 debenture is issued at Rs. 90, then
Rs. 10 is the discount amount.
(3) Issued at premium: When the price of the debenture is
more than its nominal value, it is said to be issued at a
premium.
For ex.: a Rs. 100 debenture is issued for Rs. 105 and
Rs. 5 is the premium amount.

7.7 CONDITIONS FOR ISSUE OF DEBENTURES:

The following conditions must be satisfied for issuing a
Debenture as per Companies Act, 2013:
(a) No company will issue any debentures that carry any voting
rights.
(b) No company will issue a prospectus or make an offer or
invitation to the public or to its members in excess of five
hundred for the subscription of its debentures.
(c) An issue of debenture for more than 500 members or any
number of public that is subject to clarification from
government without the creation of a debenture trust is
forbidden.
(d) A debenture trustee will take steps to protect the interests of
the debenture holders and remedy their grievances.
(e) Any provision of trust deed or contract that is protected by
trust deed exempting a trustee or indemnifying him against
any liability for violation of trust will be void.
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(f) If any default is made in compliance with the order of the

Tribunal under this section, every officer of the company who
is in default will be punished with imprisonment for a team
which may extend to a period of 3 years or with fine which
will not be less than Rs. 2 lakh but which may extend to
Rs. 5 lakhs or with both.
7.7.1 Provisions Regulating Issue of Debentures:
(1) Appointment and Duties of Debenture Trustee: In terms of
Section 117B, it has been made mandatory for any company
making a public issue of debentures to appoint one or more
debenture trustees before issuing the prospectus or letter of
offer and to obtain their consent which shall be mentioned in
the offer document. The Debenture trustee shall not:
(a) Beneficially hold shares in a company.
(b) Enter into any guarantee in respect of principal debt
secured by the debentures or interest there on.
(c) Protecting the interest of the debenture holders by
addressing their grievances.
(d) Ensuring that the assets of the company issuing
debentures are sufficient to discharge the principal
amount.
(e) To ensure that the offer document does not contain any
clause which is inconsistent with the terms of the
debentures or Trust Deed.
(f) To ensure that the company does not commit any breach
of the provisions of the Trust Deed.
Issue of Debentures 191

(g) To convene a meeting of the debenture holders as and

when required.
(2) Debenture Trust Deed: A debenture trust deed shall include
the following
(a) An undertaking by the company to pay the Debenture
holders, principal and interest.
(b) Clauses giving the Trustees the legal mortgages over the
company’s freehold and leasehold property.
(c) Clause giving the Trustees the power to take possession
of the property charged when security becomes
enforceable.
(d) Register of Debenture holders, meetings of all debenture
holders and other administrative matters may be
included in the Deed.
(3) Creation of Debenture Redemption Reserve: This account
will be credited with proceeds from the profits of the
company arrived at every year till redemption of the
debentures. SEBI regulations provide for creation of security
within 6 months from the date of issue of debentures and if a
company fails to create the security within 12 months, it shall
be liable to pay 2% penal interest to the debenture holders. If
the security is not created even after 18 months, a meeting of
the debenture holders will have to be called to explain the
reasons thereof. Further, the issue proceeds will be kept in
escrow account until the documents for creation of securities
are executed between the Trustees and the company.
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(4) Default: In the event of failure on the part of the company to

redeem the debentures on the date of maturity, the company
law Tribunal may, on the application of any debenture
holder, direct redemption of debentures forthwith by
payment of principal and interest due thereon. If a default is
made in complying with the orders of the Tribunal, every
officer of the company who is in default shall be punishable
with imprisonment for a term which may extend to 3 years
and shall also be liable to fine of not less than 500 Rs. for
every day during which the default continues.
7.8 PROCEDURE FOR ISSUE OF DEBENTURE:
(1) Call Board Meeting: Call and hold a board meeting and
make a decision on the type of debentures to be issued. In the
board meeting resolutions for Approval of the following are
passed.
(i) Offer letter for private placement in Form Number PAS-4
and application forms.
(ii) Approval of form Number PAS-5.
(iii) Sanction of Debenture Trustee Agreement and
appointment of a Debenture Trustee.
(iv) Appointment of an expert for approval of increase of
borrowing powers, if required.
(v) To authorize for creation of charge on the assets of the
company.
(vi) Agree to the Debenture Subscription Agreement.
(vii)To fix day, date and time for the extraordinary general
meeting of the shareholders.
Issue of Debentures 193

(2) Prepare the following Documents: Based on the decisions of

the Board meeting, prepare the following documents and
issue a notice for extraordinary general meeting.
(i) Debenture Subscription Agreement.
(ii) Offer letter for private placement in Form Number PAS-4
and application form.
(iii) Records of private placement offer in Form Number PAS-
5.
(iv) Debenture Trustee Agreement.
(v) Mortgage Agreement for creation of charge on assets of
the company.
Finally to issue notices for extraordinary general meeting
together with the explanatory statement.
(3) Extraordinary General Meeting: Extraordinary General
Meeting is held and special resolution to issue the type of
debenture is passed ex. convertible secured debenture and
augment borrowing powers of the company and sanction the
Board to create a charge on the company’s assets.
(4) Prepare and File Documents: On approval of the debenture
issue, prepare and file the following documents:
(i) File Form Number PAS-4 and PAS-5 with the Registrar of
Companies (RoC).
(ii) File offer letter in Form Number MGT with the RoC.
(iii) File copy of Board resolutions, Special Resolutions,
Debenture Subscription Agreement, Debenture Trustee
agreement with RoC.
194 Vipul’sTM Merchant Banking

(iv) File Form Number PAS-3 related to return of allocation

with the RoC after making allocation of Debentures.
(v) File Form Number CHG-9 for the creation of charge on
assets related to the company.
(5) Certificate of Debenture: On receipt of the application form
from the investors subscribing for the Debentures, the board
needs to make allotment of debenture certificates. The
certificate of debenture should be issued within a period of 6
months from the date of allocation.
(6) Creation of Debenture Redemption Reserve: Company then
needs to create Debenture Redemption Reserve account and
needs to transfer adequate amount from profits of every year
till redemption of the debentures. Such amount would be
utilized by company for payment of debenture amount.

7.9 CURRENT SCENARIO:

India’s financial system has traditionally been largely
dominated by the banking system where a majority of the
corporate entities depend on loans from banks and financial
institutions and they have not shown much interest in raising
even a small part of the required long term resources from the
market through bonds and other debt instruments. The various
sources of funding for the industry for its business needs are bank
credit, external commercial borrowings, commercial papers and
certificate of deposits. There is a need for mobilizing funds from
the corporate bond market as it provides an alternative source of
finance and supplements the banking system to meet the
requirements of the corporate sector to raise funds for long term
Issue of Debentures 195

investments. However, of late there has been a change and it is

observed that the industry is gradually expanding its reach
towards the corporate bond market and reducing its reliance on
bank credit. The diagram gives a comparison of bank credit to
corporate bonds.
It can be seen in the Table that since FY 2012-13, there has been
an increase in lending through bank loans as compared to
corporate bonds. However, there was a slight dip in bank credit in
FY 2014-15 as compared to FY 2013-14. Further, in FY 2016-17,
there was lending of only Rs. 6.32 lakh crore through bank credit
(till March 31, 2017) whereas around Rs. 6.7 lakh crore was raised
through the issuance of corporate bonds. The growth in bank
credit was lower primarily due to less demand from the corporate
sector as well as banks being saddled by huge NPAs and stringent
capital requirements under Basel norms. The size of the corporate
bond market is increasing every year which shows that corporates
and borrowers are gradually favouring raising funds through the
corporate bond market. Better transmission of policy rate changes
to the bond market and increased transparency and price
discovery could be possible reasons for a spike in the corporate
bond market. It is understood that when a corporate issues
bonds/debentures which are subsequently listed and traded on
the stock exchange, the financials, credit ratings of such
bonds/issuers and details such as defaults made by the issuer in
honouring its debt obligations are available in the public domain.
The availability of such information in the public domain enables
investors to assess the health of the company and make prudent
196 Vipul’sTM Merchant Banking

investment decisions. Thus, corporate bonds are emerging as one

of the preferred sources of financing by investors.
The Government of India has also been proactive and taken a
number of measures for the deepening of the corporate bond
market in India. The statistics only point towards a developing
corporate bond market in India. A vibrant and a deep corporate
market will go a long way in improving the growth of the
economy and sustaining its huge infrastructure requirements.
C omparison of bank c
r edit to corpo ratebond s
800,000
700,000
Amount ( Rs. Crore)

600,000
500,000
400,000
300,000
200,000

0 2012-13 201
3- 14 2014-15 2015-16 201
6- 17

YearC

BankCredit r pora
o t eBonds

Trading in the Corporate Debt Market:

BSE NSE

Year/Month No. of Traded No. of Traded

Trades Value in Trades Value in
Crores Crores

2010 -11 4,448 39,528 8006 1,55,951

2011-12 6,424 49,842 11,973 1,93,435

2012-13 8,639 51,622 21,141 2,42,105

2013-14 10,187 1,03,027 20,809 2,75,701

Issue of Debentures 197

2014-15 17,710 2,04,506 58,073 8,86,788

2015-16 16,900 2,07,652 53,223 8,14,756

Apr 15-Dec 15 12,469 1,61,880 39,471 6,05,499

Apr 16-Sept 16 17,190 1,92,980 46,644 8,43,497

Source: SEBI.
With investors lapping up offers with funds mobilised by
companies through non-convertible debentures (NCDs) has
jumped by nearly 16 times in the first half of 2016-17. Firms have
raised a record 23,901.4 crore through NCDs between April and
September, data with markets regulator SEBI showed. This is the
highest ever in the first six months of a financial year since SEBI
started publishing data on public issue on NCDs from 2008-09.
The NCD offers were subscribed nearly 2.75 times on an
average in the first half of 2016-17. NCDs, which are primarily
loan-linked bonds, have turned into an attractive investment
proposition due to the high returns they offer. NCDs that closed
in September are offering returns of 8.55%-9.25% per year. They
provide interest on an annual basis. In contrast, most banks are
giving interest rate of around 7.25% for one-year fixed deposits
(FDs).
Bank FDs have become unattractive in a falling interest rate
regime. NCDs, however, offer higher returns. This is driving
investor appetite in NCDs, say industry experts. Interest rates are
going down by the day. NCDs have become popular as they give
better returns than bank FDs.
198 Vipul’sTM Merchant Banking

Dewan Housing Finance Corporation (DHFL) and Kosamattam

Finance took the NCD route twice to raise capital. The NCD issues
of DHFL, Mahindra and Mahindra Financial Services and
Indiabulls Housing Finance saw good interest from investors.
DHFL’s maiden NCD issue, which opened in August, was
subscribed nearly 19 times on the first day itself.
The second issue with a base size of 2,000 crore, which also
opened in August, and was worth up to 10,000 crore was
subscribed more than six times on the first day itself. This
prompted DHFL to close the NCD issue on August 30, the second
day of the offer, itself. The issue was scheduled to close on
September 12.
Indiabulls Housing’s NCD, which opened on September 15,
was subscribed 117 times on the Bombay Stock Exchange within
the first hour of the bidding process. The NCD, with a base size of
3,500 crore, raised 7,000 crore.
In terms of number, funds were raised through 10 issuances in
the first half of 2016-17 compared to just four in the same period
the previous year. Companies had raked in 33,811.9 crore from 20
issuances during 2015-16, while in 2014-15, they had raised 9,713.4
crore through 25 issuances.

7.10 CASE STUDY OF SAHARA INDIA:

Securities Exchange Board of India v. Sahara India Real Estate Ltd.
is regarded as one of the landmark cases with reference to the
power and jurisdiction of SEBI in the case of corporate
fundraising. SEBI claimed that in the form of Optionally Fully
Convertible Debentures, Sahara India Real Estate Corporation
Issue of Debentures 199

Limited (SIRECL) and Sahara Housing Investment Corporation

Limited claim to have collected deposits from general public
including cobblers, labourers, artisans and peasants. Around 23
million people, mostly form villages and small towns subscribed
to this scheme and invested about 24,000 crores rupees. Now
before moving on with the main crux of the case, one should
understand the term “Optionally Fully Convertible Debentures”.
Optionally Fully Convertible Debentures:
Debenture can be understood as an instrument to raise loan by
the company. For example, if a company X requires capital in
order to proceed with its new idea or project it can opt to raise
capital by taking a loan from the bank, but that would raise the
issue of high interest rate and other terms which the company
should adhere to. In this case, the company has an option to raise
a loan from the public by means of debentures. One of the
important aspects of this type of fundraising is that the company
has to pay the specified amount with interest, and although the
money raised by the debentures becomes a part of the company’s
capital, it does not become share capital. The company can issue
secured and unsecured debentures. A debenture may be wholly
or partially convertible at the time of redemption depending on
the fact that whether the special resolution is passed by the
shareholders. Now under Optionally Fully Convertible
Debentures, it depends on the choice of the investor as when the
debt holder wants to convert its debentures into shares. The
conversion is good in case the company is about to make a good
amount of profit, or the price of the shares of the company is
about to increase. Thus, the very fact which should be taken into
200 Vipul’sTM Merchant Banking

consideration is that the investor in this case where he has been

issued OFCD should have basic ideas of the performance of the
company, market fluctuations and other financial market aspects
to gain on the conversion of the debentures.
Sahara’s Manoeuvre:
One of the noteworthy facts of this case was that Sahara took
investment from the people belonging to the lower strata of the
society who don’t have much idea about the working of financial
institutions, fluctuations in the market and the skill to check the
daily performance of the company. Sahara claimed that it was a
private placement and only selected clients were intimated about
the scheme. SEBI has no jurisdiction with respect to the same as its
jurisdiction is restricted only to listed company. It also contended
that OFCDs issued by the company does not fall within the ambit
of the definition of the “securities” as provided under the SEBI
Act. The main contention raised by the Sahara was that SEBI has
no jurisdiction over the unlisted companies and, therefore,
objected its interference in the present case on the ground that the
said company comes within the ambit of Unlisted Public
Companies Rules 2003.
Objections Raised by SEBI:
As per the provision of Section 55A of the Companies Act,
2013, it paves the path for SEBIs jurisdiction and also restricts it to
listed public company and in this case, the company in question
being an unlisted one does not fall within the ambit of SEBIs
jurisdiction. As per the facts of the case if Sahara contends that it
was a private placement and only selected clients were asked for
investment then the whole task of OFCD should have been
Issue of Debentures 201

wrapped up within 10 days as per rules and regulations and in

adherence to the guidelines and also the offer should have been
restricted to not more than 50 members. But in this case more than
23 million people invested in the scheme and it went down for
more than 2 years which made it an obligation on the company to
make it listed as per Section 73 of the Companies Act, 2013 which
prohibits private company to take deposits from the public and
allows only eligible companies to accept deposits from the public.
It must be intimated to the registrar of the company and in such a
circumstance brings it within the purview of the SEBI. Therefore,
in the light of facts provided and arguments advanced SEBI
contented that OFCD scheme is within the purview of the
definition of securities as provided by SEBI Act 1992 and Sahara
should be obligated to refund the deposits of more than Rs. 24,000
crores to its investors as it was taken in contravention of the laws
of the land.
Supreme Court Remarks:
 Supreme Court finally made an important observation that it
was stated by Sahara company that its OFCD scheme was a
kind of private placement and included only selective clients
yet it failed to prove the same, and it is very well evident that
it was a kind of public offer in which more than 23 million
people invested over which SEBI has complete authority.
 In the case of private placement, the documents should be
submitted by the company that its investors had some
relation with the company which in this case was not proved
by the Sahara group and thus it does not qualify the claim of
the investment being a private placement.
202 Vipul’sTM Merchant Banking

Decision of the Case:

The Hon’ble Supreme Court ordered Sahara to refund the
entire deposits collected by it through Red Herring Prospectus at
an interest rate of 15% till the date of refund. It also authorised
SEBI to take legal recourse in case the appellant i.e. Sahara fails to
comply with the said order.

7.11 QUESTIONS FOR SELF PRACTICE:

(1) Multiple Choice Questions:
(a) __________ is not the owner of the company.
(i) Equity shareholder
(ii) Debenture holder
(iii) Preference shareholder
(iv) Brokers
(b) Which of the following statement is true?
(i) Debentures cannot be issued at a discount.
(ii) Debentures cannot be converted to shares.
(iii) Perpetual debentures are also known as
Irredeemable Debentures.
(iv) Debentures cannot be issued at a premium.
(c) __________ debentures have a charge over the assets of
the company.
(i) Secured Debentures
(ii) Registered Debentures
(iii) Bearer Debentures
(iv) Redeemable Debentures
(d) _________ account is credited with the proceeds from the
profits of the company every year till redemption of the
debentures.
(i) Profit and Loss A/c
(ii) Interest A/c
(iii) Nominal A/c
(iv) Debenture Redemption Reserve A/c
(e) Debenture holders receive __________.
Issue of Debentures 203

(i) Interest
(ii) Dividend
(iii) Bonus shares
(iv) None of these
[Ans.: (a – ii); (b – iii); (c – i); (d – iv); (e – i)]
(2) Multiple Choice Questions:
(a) __________ debentures have a charge over the assets of
the company. (Oct. 18)
(i) Secured
(ii) Unsecured
(iii) Registered
(iv) Bearer
(3) Fill in the Blanks
(a) __________ market is the financial market where investors
buy and sell debt securities in the form of bond.
(b) The fixed return on the bond is termed as __________.
(c) Government Securities are considered as __________ risk
investment.
(d) Debenture is derived from the Latin word __________
which means to owe a debt.
(e) Debentures that are perpetual are called __________
debentures.
[Ans.: (a) Debt, (b) Coupon Rate, (c) Low, (d) Debere, (e)
irredeemable]
(4) Fill in the Blanks
(a) __________ Debentures have a charge over the assets of
the company. (Oct. 18)
(5) State whether the following statements are True or False:
(a) Debentures have voting rights.
(b) Debenture is a Money Market instrument.
(c) Debenture holder receives dividend.
(d) Unsecured Debentures are also called ‘Naked’
Debentures.
(e) A Trust Deed is an undertaking by the company to pay
the Debenture holders, principal and interest.
[Ans.: (a) True, (b) False, (c) False, (d) True, (e) True]
(6) State whether the following statements are True or False:
204 Vipul’sTM Merchant Banking

(a) Unsecured Debenture have a charge over the assets of

the Company. (April 18) (April 19)
(b) Unsecured Debentures are also called as ‘Naked
Debentures’.
(Oct. 18)
(c) Debenture is a money market instruments. (Oct. 18)
(d) Secured debentures have charge over the assets of the
company. (Oct. 18)
(7) Match the Column:
Group ‘A’ Group ‘B’
(1) Redeemable Debentures (a) Below then Face Value
(2) Irredeemable Debentures (b) Higher then Face Value
(3) Issued at Discount (c) Unregistered
(4) Issued at Premium (d) Certain Period
(5) Bearer Debentures (e) Perpetual
(6) Debenture (April 18) (f) Creditors
(7) Debenture holders (Oct. (g) Debt Instruments
18) (h) Fixed Income
(8) Debt Market (April 19)
[Ans.: (1 – d), (2 – e), (3 – a), (4 – b), (5 – c), (6 – g), (7 – f), (8 –
h)]
(8) Define Debentures. Explain its features.
(9) What are Debentures? Explain its advantages. (April 18)
(10) What are the advantages and disadvantages of debentures?
(11) Discuss the types of Debenture along it its advantages and
disadvantages. (Oct. 18)
(12) State and Explain the types of Debentures. (Oct. 18)
(13) Discuss in detail the provisions regulating the issue of
debentures in India.
(14) Discuss the procedure for issue of Debentures. (April 18;
Oct. 18)
(15) What are Debentures? Discuss its types (April 19)
(16) Write short notes on:
(a) Debentures.
(b) Bearer Debentures.
(c) Debenture trust deed.
(d) Registered and Bearer Debentures. (April 18)
Issue of Debentures 205

(e) Features of Debentures. (Oct. 18)