FOURTEENTH ANNUAL

SOUTHERN SURETY AND FIDELITY CLAIMS

CONFERENCE
New Orleans, Louisiana
APRIL 10-11, 2003

PERILS AND PROMISE OF COMMON LAW BONDS:

LIMITING THE SCOPE OF ELIGIBLE PAYMENT
BOND CLAIMS

PRESENTED BY:

ANDY L. ANDERSON
CAPITOL INDEMNITY CORPORATION
4610 UNIVERSITY AVENUE
P.O. Box 5900
MADISON, WI 53705-0900
(608) 232-0478

GREGORY P. BROWN
HILL, WARD & HENDERSON,
P.A.
101 EAST KENNEDY BLVD., SUITE 3700
TAMPA, FLORIDA 33602
(813) 221-3900
Andy L. Anderson

Andy has been active in the insurance/surety industry the past 22 years since graduating
from Fort Hays State University (BS Finance) in 1980. Originally, Andy was a bond
underwriter with USF&G in Wichita. Subsequently, he transferred to the claim department
as a multi line adjuster. He then worked for the FDIC as an investigator with the Division of
Liquidation, primarily in auditing failed financial institutions and pursuing claims against
carriers for Bankers Blanket Bonds, D & O, and Accountants Liability/ E & O. The last 14
years he has worked in the F/S Claims area for both USF&G in Baltimore, Maryland and
currently with Capitol Indemnity Corporation in Madison, Wisconsin, concentrating primarily
on claims involving Performance/Payment Bonds and Commercial Surety-Fidelity.

Andy has provided papers and previously spoke at Southern Surety and Fidelity Claims
Association as well as for the Large Bond Producers Conference on various related topics.

Gregory P. Brown

Gregory P. Brown joined Hill, Ward & Henderson in 1996 and is an associate in the firm.
He received a B.A. degree in English Literature from the University of Pennsylvania in
1991, and his J.D. degree (with honors) from the University of Florida College of Law.
While at the University of Florida, Greg served as a member of the Justice Thornal
Campbell Moot Court Board. He is admitted to practice in the United States District Court
for the Northern, Southern and Middle Districts of Florida.

Greg practices in the area of creditors’ rights and general commercial litigation, primarily
representing contractors and sureties in construction cases and has published articles on
various related topics. Greg is a member of The Florida Bar and the Hillsborough County
and American Bar Associations, and was recently elected to the Board of Governors for the
Young Lawyer Division of the Florida Bar.

i
 TABLE OF CONTENTS
Biographies.......................................................................................................................i

Table of Contents.............................................................................................................ii

1. INTRODUCTION.....................................................................................................1

2. DIFFERENCE BETWEEN A STATUTORY

AND COMMON LAW BOND..................................................................................1

3. MAJORITY RULE CONCERNING

EXTRA-STATUTORY PROVISIONS.....................................................................2

4. WHERE THE BOND LANGUAGE DICTATES

THE NATURE OF THE BOND – THE FLORIDA RULE........................................3

5. POTENTIAL CONSEQUENCES OF FAILURE TO

COMPORT WITH STATUTORY REQUIREMENTS..............................................4

6. LOWER TIER OR SUBCONTRACTOR’S BONDS...............................................4

7. CASE STUDY: THE SUBCONTRACTOR’S BOND

SURETY VS. THE EMPLOYEE LEASING COMPANY.........................................5

8. EMPLOYEE LEASING COMPANY IS NOT PROTECTED

BY CHAPTER 713..................................................................................................6

9. THE PROPOSAL....................................................................................................7

10. DRAFTING A COMMON LAW BOND WITH SOME STATUTORY PROTECTIONS..........8

11. CONCLUSION........................................................................................................8
.............................................................. .

ii
 Perils and Promise of Common Law Bonds:
Limiting the Scope of Eligible Payment Bond
Claims

By Andy Anderson, Capitol Indemnity Corporation

& Gregory P. Brown, Hill, Ward & Henderson, P.A.

1. Introduction

This paper topic was born of a rather esoteric Florida payment bond issue the
authors faced this past year. As we researched the claim, the final outcome yielded some
valuable insights worthy of consideration by practitioners and claim handlers irrespective of
the jurisdiction in which they practice.

Surety lawyers often encounter instances where what purports to be a statutory

bond fails to include pertinent statutory requirements. More significantly, we have also
encountered extra-statutory provisions, which often appear to provide greater coverage
than that which is necessary under the pertinent bond statute. In some jurisdictions,
including Florida, the inclusion of these extra-statutory provisions can have serious financial
consequences for the surety.

The surety often has little input regarding the content of the offending instrument,
and is simply asked to execute a bond form mandated by the terms of the general or
subcontract bid documents. Where the surety does not participate in the drafting of a
payment bond, the surety will often end up underwriting risk that would never be visited
upon the owner or, as the case may be, the general contractor and the first tier surety. In
other words, the expansive language of the bond creates an unnecessarily broad scope of
coverage for the surety.1 This problem is not without a remedy.

Before undertaking a discussion of this issue, it is first important to understand the

difference between a statutory and common law bond. It is also important to understand
how various jurisdictions will treat a bond that on its face does not fall squarely within either
category.

2. Difference Between a Statutory and Common Law Bond

Simply put, a statutory bond is one that is given pursuant to a statute, while a
common law bond is not. A bond specifically referring to a statute and employing the
statute’s terms is unquestionably a statutory bond. A common law bond is ordinarily a
contract privately given without qualifying laws, which is strictly construed and not extended
beyond the scope of the terms contained therein. A statutory bond on the other hand is
given to the public in the

1
While there are occasions when a general contractor may have some reason for requiring more
expansive bond coverage in a subcontractor’s payment bond, most often a general contractor is
simply looking to reduce its payment bond exposure by providing lower tier bond claimants, who
1
might otherwise be eligible to make a claim against the general contractor’s bond, an additional
source of recovery.

2
observance of law and is to be read, construed and enforced according to the statute
pursuant to which it is given.2 With a statutory bond, the provisions of the statute are read
into the bond and considered a part of the bond.

The general distinction between a statutory bond and a common law bond is that the
former is required by and conforms to a statute, while the latter is not required by statute, or
if required, is insufficient to fulfill the statutory requirements.3 The primary test in
determining whether a bond is a statutory or a common law bond requires an examination
of the obligations imposed upon the principal and its surety. The test requires a comparison
of the minimum requirements enunciated in the statute and the language contained in the
bond.

3. Majority Rule Concerning Extra-Statutory Provisions

Most jurisdictions appear to follow a few logical rules when construing statutory
bonds. A bond issued in connection with a public project will be construed to contain the
minimum requirement of the statute – among other things, the surety must provide
coverage to all claimants protected by the statutory scheme.4 Where statutory provisions
are absent, they are simply read into the bond.5 Statutory payment bonds are liberally
construed to carry out their legislative purpose - that is to protect labor and material
suppliers.6
Problems arise when a bond contains extra-statutory provisions, or terms which
appear to provide coverage broader than what is contemplated by the controlling statute.
Courts in most jurisdictions will simply hold a surety to whatever extended protection is
provided in its bond. Dow-Par, Inc. v. Lee Corp., 644 N.E.2d 150, 155-157 (Ct. App. Ind.
1994); C.S. Luck & Sons v. Boatwright (1932), 157 Va. 490, 499, 162 S.E. 53, 56;
Travelers Indem. v. Housing
Auth. Of Miami (1972), Fla.App., 256 So.2d 230, 234; Wal-Board Supply v. Daniels (1981),
Tenn.App., 629 S.W.2d 686, 688; Aluma Systems, Inc. v. Frederick Quinn Corp. (1990), 206
Ill.App.3d 828, 151 Ill.Dec. 618, 635-36, 564 N.E.2d 1280, 1297-98; 17 Am.Jur.2d Contractor’s
Bond Section 73 (1990); but cf. Construction Materials v. American Fidelity Fire Ins., 383
So.2d 1291, 1294 (La. App. 1980) (a public works bond can be neither broader nor
narrower than the law which provides for it, and anything provided for by law and omitted
from the bond must be read into the bond while anything provided by the bond which goes
beyond the provisions of the law must be read out of it).
In Dow-Par, an Indiana appellate court determined that a lessor of earth moving
equipment was not a claimant protected by the public works bond statute. This did not,
however, end the court’s analysis. The court found that by adding extra-statutory provisions
to its payment bond, the surety had expanded the scope of its coverage beyond that which
was required by the public work bond statute. According to the bond, a claimant was “one

2
See Penal Bonds: Indemnity Bonds: Official Bonds 12 Am. Jur. 2d Bonds Section 2 (2002).

3
Id.

4
See Martin Paving Company v. United Pacific Insurance Company, 646 So.2d 268 (Fla. 4th DCA 1994);
La Bair v. Mayville Feed & Grain, Inc., 96 BR 755 (Bankr. E.D. Mich. 1989).

5
See Mount Florence Group v. City of Peekskill, 235 A.D.2d 787 (N.Y. App. Div. 1997).
6
See Redbird Engineering Sales, Inc. v. Bi-State Dev. Agency, 806 S.W.2d 695 (Mo. Ct. App. 1991).
having a direct contract with the [principal], or with a sub-contractor of the principal for…
rental of equipment directly applicable to the contract.” Id. at 156. The Court found that the
bond’s definition of a claimant exceeded the requirements of the public works bond statute
and encompassed the lessor’s claim.7

It is not surprising that, like the Dow-Par court, most courts will enforce public works
bonds in accordance with their written terms, given the public policy behind such bonds –
protecting laborers and materialmen. What is surprising are the lengths to which courts in
both Florida and Tennessee have gone to promote this policy.

4. Where the Bond Language Dictates the Nature of the Bond – The Florida Rule

Florida and Tennessee state courts have ruled that the inclusion of extra-statutory
provisions will divest a bond of its status as a statutory bond. Florida Keys Community
College
v. Ins. Co. of North America, 456 So.2d 1250 (3d DCA 1984) is one of the most often cited
cases for the proposition that a public works bond may be construed as a common law
bond if its provisions are more expansive than those required by the applicable bond
statute.

In Florida Keys, a community college brought an action against building contractors

and their sureties for alleged construction defects at a fine arts center. The trial court
dismissed the claims against the sureties on the grounds that they had not been filed within
the one year period set forth in section 255.05(2), Florida Statutes, Florida’s public works
bond statute.

The community college appealed. The Third District Court of Appeals reversed,
holding that the bonds in question were common law bonds not subject to the one year
limitations period, but rather subject to the four year limitations period applicable to
common law bonds. The court simply held that where a bond provides more extensive
coverage than the minimum statutory requirements, it will be construed as a common law
bond for all purposes. The court wrote in support,

[t]he primary test in determining whether a bond is a statutory bond or a

common law bond depends upon an examination of the obligations imposed
upon the principal and its surety. The test requires a comparison of the
minimum requirements enunciated in the statute and the language contained
within the bond…. We reject the argument proposed by the sureties that it
was incumbent upon the college to find a bond which qualified under [the
public works bond statute] and no other bond was allowable. They maintain
that any bond obtained in satisfaction of the statute must be deemed a
statutory bond regardless of its expanded provisions. Their argument ignores
the many cases which recognize distinctions in bonds issued in connection
with public projects. Even though a bond is furnished pursuant to a public
works project, it will be construed as a common law bond if its provisions are
more expansive than those required by [the public works bond statute].

7
The court disregarded the surety’s argument that because the equipment lease was not made in
contemplation of use on the bonded project, it was not “equipment directly applicable to the contract”
and thus fell outside the scope of the bond.
Id. at 1252 (citation omitted).

Tennessee state courts apply the same analysis, finding that where a bond gives a
claimant greater protection than that required by the statute, the bond is deemed a
common law bond for all purposes. White’s Electric, Heating, Air and Plumbing v. Lewis
Construction Co., 199 WL 605654 (Tenn.Ct.App. 1999); Wal-Board Supply Co. v. Daniels,
629 S.W.2d 686, 687 (Tenn. App. 1981); see also Koch v. Construction Technology, Inc.,
(924 S.W.2d 68 (Tenn. 1986)

(We cannot agree with the Court of Appeals’ conclusion that the bond is
statutory. While §12-4-201 merely requires the general contractor to pay for
all the labor and material used by the general contractor or an immediate or
remote subcontractor, the bond in the instant case goes further. In the second
paragraph quoted above, the principal and surety agree not only to pay for
labor and materials, but also to pay ‘all just claims for damages and injuries to
property.’ This is clearly an obligation above and beyond that contemplated
by the statutes. Moreover, the bond makes no explicit reference to the [public
works bond statute].)

Needless to say, these decisions make drafting a statutory bond in Tennessee and
Florida a treacherous prospect. Fortunately, the Florida Statutes now provide forms
sufficient to meet the requirements of both the public8 and private9 project bond
requirements. Sureties are not, however, out of the water in Florida – sureties still face
trouble when agreeing to underwrite subcontractor’s bond.10

5. Potential Consequences of Failure to Comport with Statutory Requirements

As mentioned above, with few exceptions, most jurisdictions permit a surety

providing a statutory bond to expand the scope of the bond coverage, particularly when the
expanded coverage relates to the nature of eligible bond claimants. The negative financial
consequences of doing so are evident: the surety will be forced to cover claims that would
not have been compensable under the applicable bond statute. In addition, when a court
determines that a bond is a common law instead of a statutory bond, the surety may be
deemed to have waived the statutory notice requirements, and as we saw in Florida Keys,
may also be subject to a lengthier statute of limitations period.

6. Lower Tier or Subcontractor’s Bonds

Lower tier bonds or subcontractor’s bonds are seldom mandated by statute, and by
their nature are typically characterized as common law bonds. Where the bond is supplied
on a public project, however, courts may allow the public bond statutes to influence the
nature of

8
§ 255.05(3), Fla. Stat.
9
§ 713.23(3), Fla. Stat.

10
For a complete discussion of this topic see Patrick J. O’Connor, Statutory Bonds or Common Law
Bonds: The Public-Private Dilemma, Tort & Ins. L.J. 77 (Fall 1993)
a subcontractor’s bond. The Minnesota court of appeals has concluded that a
subcontractor’s bond on a public project may be construed as a statutory bond.

In Iowa Concrete Breaking Corp. v. Jewat Trucking, Inc., 444 N.W.2d 865 (Ct. App.
Minn. 1989), a supplier of concrete breaking equipment brought suit against a
subcontractor and its surety when the subcontractor defaulted on its payment obligation.
The subcontractor’s payment bond did not expressly cover attorneys’ fees, and therefore
the subcontractor’s surety argued that the trial court erred by awarding fees. The appellate
court disagreed. In upholding the fee award, the appellate court pointed out that the
subcontractor’s bond incorporated all the terms of the subcontract, including the flow-down
provisions, which required the subcontractor to undertake all the general contractor’s
obligations to the state. One of the general contractor’s obligations, by virtue of the public
works bond statute, was to cover reasonable attorneys’ fees. In this way, the appellate
court for all practical purposes turned the parties’ common law bond into a statutory bond.

A few years later, on the same project, the court of appeals again had an opportunity
to address this issue when another supplier was left unpaid by the same subcontractor.
Saint Paul Fire and Marine Ins. Co. v. Central National Insurance Co. of Omaha, 480
N.W.2d 681 (Ct. App. Minn 1992). In this case, the issue was not attorneys’ fees, but
whether the action was time-barred under the one year limitations period contained in the
payment bond. The court held that the subcontractor’s surety was collaterally estopped
from arguing that the Minnesota public works statute did not control the payment bond. The
one year limitation in the subcontractor’s bond was superceded by the more liberal
limitations rule under the statute. In support, the court restated its prior holding:

More specifically, the trial court and court of appeals were asked in that case
[the Iowa Concrete case] to construe whether both the payment bond and the
performance bond were governed by the provisions of the [Minnesota Public
Works Statute]. Both courts concluded that the [bond], by incorporating [the]
subcontract, where essentially converted from private to statutory
bonds….Once this court concludes that the payment bond takes on the terms
and conditions of the statutory bond by virtue of [the subcontractor’s surety’s]
incorporation of the subcontract, [the surety’s] ‘separate’ defense based upon
the bond’s status as a private bond in the instant action must fall.

Id. at 684.

As we see in these Minnesota cases, the incorporation of a public bond statute may
have a negative impact on the surety. One would hope, however, that the logic underlying
the Iowa Concrete and Saint Paul cases could be used in favor of a subcontractor’s surety.
As discussed in some detail in section 7 below, a subcontractor’s surety may attempt to
use a reference to the applicable public works statute to limit the scope of eligible claimants
under a subcontractor’s bond.

7. Case Study: The Subcontractor’s Bond Surety vs. The Employee Leasing
Company

A recent legal matter involving the company and the firm of the two authors provides
a very good illustration of how appropriate limiting language in a lower tier bond can make
a
substantial difference in a surety’s exposure. During December 2001, Capitol Indemnity
Corporation provided a subcontractor’s bond on a Florida public project. Capitol had little
say in the drafting of the bond language; the general contractor on the project provided the
form. Attached as composite Exhibit A is a copy of both the payment and performance
bonds provided on the project.

Unfortunately, Capitol’s principal, the bonded subcontractor, defaulted on its

payment and performance obligations, and Capitol began fulfilling its bonded obligations. In
the very early going, Capitol received a claim from an employee leasing company and
developed some immediate concerns. Capitol was first concerned that there was no
verified connection between the particular employees and the project. The employee
leasing company provided only general payroll ledgers for laborers, whom it alleged had
performed work on the project at various times. These ledgers did not reference in any way
the bonded project. Upon a request for more specific information, lo and behold, the
employee leasing company discovered that it had overstated its claim – many of the
employees had performed work on other projects, and these hours were included in the
general payroll ledgers submitted to Capitol.
Having tackled that issue, Capitol became concerned that the employee leasing
company was also seeking reimbursement for salaried management personnel, which
Capitol believed could not be fairly characterized as “laborers” under the applicable public
works bond statute. This concern led Capitol to contact Florida legal counsel. Immediate
research on the topic revealed a more significant point: under Florida law, an employee
leasing company may not be entitled to assert a claim against a statutory payment bond at
all. In response to the employee leasing company’s renewed demand, Capitol forwarded
V.L. Orlando Bldg. Corp.
v. Skilled Services Corp., 769 So.2d 526 (5th DCA 2000).

8. Employee Leasing Company is Not Protected by Chapter 713

In V.L. Orlando, a labor pool sought to file and foreclose a mechanics lien. The
owner defended on the grounds that the labor pool was not entitled to record and foreclose
a lien against the property because a labor pool does not fall within the definition of persons
entitled to a lien pursuant to Chapter 713, Florida Statutes. 11 The labor pool attempted to
argue that it fell within the definition of “laborer” under subsection 713.01(14). The court
disagreed finding that under the plain language of subsection 713.01(14) a laborer must
“personally” perform labor on the site of the improvement and must not furnish labor or
services of “others.” Id. at
528. The labor pool was simply not allowed to file a lien as a laborer under Chapter 713
because it had performed the work itself.

Capitol used V.L. Orlando in support of its position that, like a labor pool, the
employee leasing company did not personally perform project work and thus could not
make a claim against Capitol’s bond as a laborer. Negotiations began to heat up, and the
employee leasing company began heading in the wrong direction. Rather than argue that
Capitol’s bond was a common law bond and not a Chapter 713 bond, the employee
leasing company simply

11
Chapter 713 not only defines those parties eligible to file and foreclose a lien, but also those parties
entitled to make a claim against a private project bond and a public project bond provided pursuant to
section 255.05, Florida Statutes.
attempted to undercut V.L. Orlando. The employee leasing company provided Capitol with
a copy of 2001 Florida Senate bill (attached as Exhibit B), asserting that the Florida Senate
had responded to the “unjust” outcome in V.L. Orlando by including “temporary help firms”
within the definition of the “sub-contractors” and “sub-subcontractors”, which, like laborers,
are also covered by a Chapter 713 bond. In its renewed demand letter, the employee
leasing company did not, however, cite to the full text of the amendment, leaving off the
part that referenced section 443.101, Florida Statutes, which now supplies the definition of
a “temporary help firm.”

Capitol responded to this last gasp by providing a copy of section 443.101, which
reads, in pertinent part:

“Temporary help firm” means a firm that hires its own employees and assigns
them to clients to support or supplement the client’s workforce in work
situations such as employee absences, temporary skill shortages, seasonal
workloads, and special assignments and projects. The term also includes a
firm created by an entity licensed under s. 125.012(6), which hires employees
assigned by a union for the purpose of supplementing or supporting the
workforce of the temporary help firm’s clients. The term does not include
employee leasing companies regulated under part XI of chapter 468.
(emphasis added)

The employee leasing firm perceived itself to be out of options, and Capitol settled
the claim for substantially less than the original $250,000 demand. However, all of this is
not much more than background, the real teaching point here is in the subtext. The reason
Capitol paid any money to settle the employee leasing company’s claim pre-suit was
because a Florida court would likely have deemed Capitol’s bond a common law bond. The
bond does not reference either section 255.05 (the public bond statute), nor does it
reference section 713.23 (the private bond statute). Moreover, Florida’s statutory law, like
most other state’s laws, does not directly contemplate a subcontractor’s bonds and with the
Florida Keys case, it is hard to imagine a scenario in which a trial court could possible
deem Capitol’s subcontractor’s bond a statutory bond.

After construing Capitol’s bond as a common law bond, a Florida court would likely
have then found that Capitol’s bond covered the employee leasing company’s claim.
Capitol’s bond defines a claimant as one “supplying labor and material in the prosecution of
the work provided for in said Subcontract.” Any argument that the employee leasing
company did not fall within this profoundly broad language would not have held much
sway.12

9. The Proposal

Contract bond sureties often underwrite risk based upon the financial strength of the
principal and its indemnitors. In addition to relying on upon factors such as credit, collateral,
personal net worth, type of contractor, years in business and work on hand, a surety should
also pay close attention to the language of the bond, particularly when it comes to
subcontractor’s bonds. Where a surety is permitted to do so, it should attempt to draft
subcontractor’s bonds that adopt the same protective measures as the statutory scheme
designed to protect the owner/surety – at least with respect to the class of bond claimants.
12
See Dow-Par, 644 N.E.2d at 156.
This can often be accomplished by simply referencing the statutory section providing
the definitions for eligible claimants.

Had Capitol been permitted to adopt the definitions of eligible claimants

under section 713.01, or had it been permitted to restrict the scope of eligible bond
claimants to those claimants otherwise entitled to recover against the general
contractor’s payment bond, it would have been overwhelmingly difficult for the
employee leasing company to recover against Capitol’s bond.

10. Drafting a Common Law Bond with Some Statutory Protections.

Attached as Exhibit C is a copy of Form Drafting Guide: Matters to Be

Considered in Drafting Statutory Bonds, 3B Am. Jur. Legal Forms 2d Bonds §43:14.
While this checklist applies to statutory bonds, many of the same considerations
must be taken into account when drafting a common law bond, such as a
subcontractor’s bond.

11. Conclusion
Commentators have suggested that an owner ought to be entitled to call for
more protection than what might otherwise be mandated by mechanic’s lien
statutes. It is hard to imagine, however, a need for an owner or general contractor to
require bond coverage for individuals or entities which would never have a lien, or,
in the alternative a recoverable claim against the general contractor’s payment
bond. The fact is a general contractor has no incentive to craft bond language that
limits the scope of eligible bond claimants to those that would otherwise make
claims against its bond, and in most cases will provide a bond form with expanded
coverage provisions. These provisions mean a surety will end up underwriting
unnecessary risk. Sureties should take steps to insure that their bonds comport with
the statutory requirements when underwriting statutory bonds and should be careful
to limit their exposure when drafting subcontractor’s bonds and other common law
bonds.
\\Johnnew\d\FORCON\Conferences\SSFCC\2003\Papers\07.Gregory P. Brown.wpd

DR. SHAKUNTALA MISRA REHABILITATION NATIONAL UNIVERSITY

LAW OF INVESTMENT AND SECURITIES

DEBENTURE AND DEBENTURES HOLDERS

SUBMITTED TO: SUBMITTED BY .

PROF.SHAIL ShAKYA SIR VIMAL SINGH

Roll No. 49

(FACULTY OF LAW)

B.COM LLB 8TH SEM.

DATE:09-04-2019
Acknowledgement

I would like to thank my subject TEACHER PROF. SHail Shakya his support and
cooperation to our group for preparation of this project Also, we are very thankful to
library staff, DSMNRU FACULTY OF LAW for providing me all the relevant material
easily. Lastly, friends and family is thanked by me for their help

TABLE OF CONTENTS
Abstract....................................................................................................3

Introduction………………………………………………………… 4

Debenture: Meaning and Characteristics.............................................6

Classification of Debentures…..............................................................8

Advantages and Disadvantages…........................................................11

Legal Compliances…...............................................................................16

Issue in private companies…..................................................................24

Debentures and Debt Market: Indian Context 27 Conclusion….........30

 Abstract

Being a qualified Company Secretary, it was an interesting task to take up

topics from corporate world. Having worked under various circumstances,
one thing was clear that a project shall be based on some real time
experiences that author has faced during her professional tenure. The
concept of debenture struck in mind of author because she has seen that
there is a lack of organized debt market in India and also, during her work
experience, she has faced some challenges in legal compliance in issuing
and listing of long term debt instruments: Debentures.

Introduction:

Finance is the lifeblood of every business. It is perhaps the most crucial factor in

deciding fate of any business enterprise. Finance is required in day-to-day transactions

of business as well as for

carrying out capital (long term) investments of the business. Keeping this in view, it is

the most important function of a financial manager that is to arrange funds for the

business from different sources. This becomes necessary under the fact that pre

determined goals of business could only be achieved when a business does not suffer

from lack of finance. It is evident in daily lives too that a person cannot carry on his daily

tasks without having financial support. Other than this, just like daily lives, a business

cannot run smoothly in absence of finance.

This therefore is the most crucial decision that a financial manager needs to take up-

composition of capital structure of an organization. Following diagram shows capital

structure and its various components:

Let us get a brief introduction of each of components of capital structures:

Equity Capital: Shareholders' equity (or stockholders' equity, shareholders' funds,

shareholders' capital employed) is the interest in remaining assets, spread among

individual shareholders of common or preferred stock. At the start of a business, owners

put some funding into the business to finance assets. Businesses can be considered to

be, for accounting purposes, sums of liabilities and assets; this is the accounting

equation. After liabilities have been accounted for, the positive remainder is deemed the

owner's interest in the business.

Preference Capital: Preferred stock, also called preferred shares or preference

shares, is typically a 'higher ranking' stock than voting shares, and its terms are

negotiated between the corporation and the investor. Preferred stock usually carries no

voting rights, but may carry superior priority over common stock in the payment of

dividends and upon liquidation. Preferred stock may carry a dividend that is paid out

prior to any dividends being paid to common stock holders. Preferred stock may have a

convertibility feature into common stock. Preferred stockholders will be paid out in

assets before common stockholders and after debt holders in bankruptcy. Terms of the

preferred stock are stated in a "Certificate of Designation".

Debt Capital: Debt capital is the capital that a business raises by taking out a loan. It

is a loan made to a company that is normally repaid at some future date. Debt capital

differs from equity or share capital because subscribers to debt capital do not become

part owners of the business, but are merely creditors, and the suppliers of debt capital

usually receive a contractually fixed annual percentage return on their loan, and this is

known as the coupon rate.

Debt capital ranks higher than equity capital for the repayment of annual returns. This
means that legally, the interest on debt capital must be repaid in full before any

dividends are paid to any suppliers of equity.

Main part of Analysis:

Our analysis will be based on long-term sources of funds: most specifically debt finds. In

India, it is important to understand that, there is no bond market. Companies and

government most often come up with issue of a long-term debt instrument known as

debenture. Let us move forward and understand meaning of term debenture, especially

in context of Indian financial markets.

Debentures: Meaning and Nomenclature:

A debenture is defined as a certificate of agreement of loans which is given under the

company's stamp and carries an undertaking that the debenture holder will get a fixed

return (fixed on the basis of interest rates) and the principal amount whenever the

debenture matures.

In finance, a debenture is a long-term debt instrument used by governments and large

companies to obtain funds. It is defined as "a debt secured only by the debtor’s earning

power, not by a lien on any specific asset." It is similar to a bond except the security

conditions are different. A debenture is usually unsecured in the sense that there are no

liens or pledges on specific assets. It is, however, secured by all properties not

otherwise pledged. In the case of bankruptcy, debenture holders are considered general

creditors. The advantage of debentures to the issuer is they leave specific assets

burden free, and thereby leave them open for subsequent financing. Debentures are

generally freely transferable by the debenture holder. Debenture holders have no voting

rights and the interest given to them is a charge against profit.

Definition of Debentures by Indian Companies Act, 1956:

The term debenture includes debenture stocks, bonds and any other security of a
company, whether constituting a charge on the assets of a company or not.
 Features of Debentures as a long-term financial (Debt) instrument:

Following are the basic features of debentures that differentiate them from other

sources of finance. After understanding meaning of different capital structures, we need

to understand peculiar characteristics of debentures that make them different from

commonly used finance sources:

● Investors who invest in the debentures of the company are not the owners of the

company. They are the creditors of the company or in other words, the company

borrows the money from them.

● Funds raised by the company by way of debentures are required to be repaid

during the life time of the company at the time stipulated by the company. As

such, debenture is not a source of permanent capital. It can be considered as a

long-term source.

● In practical circumstances, debentures are generally secured i.e. the company

offers some of the assets as security to the investors in debentures.

● Return paid by the company is in the form of interest. Rate of interest is

predetermined, but the company can freely decide the same. The interest on

debenture is payable even if the company does not earn the profits

● In financial terms, debentures prove to be a cheap source of funds from the

company’s point of view

So this thing needs to be kept in mind by a company that an investor is expected to

invest in debentures only when liquidity and financial position of company is very sound.

An investor is always careful before investing in any company, especially in debt

instruments where there is hardly any chance of capital appreciation. So, a company

that is very much sure about it financial

well-being could very well come up with issue of debentures. Debentures are also ideal

for companies, which do not want any kind of dilution in control of management. That

means, organizations, which do not want to issue shares, could come up with issue of

debentures.

Apart from that, financial manager must make sure that company is in sound enough

position to make periodic interest payments and also, repayment of principal amount at

the right time.

Classification of debentures

In India, debentures could be classified in basically two categories: on the basis of

security and on the basis of convertibility. Following diagram shows details of

classification of debentures in Indian context:

Let us now discuss each of the types of debentures, which are issues in market by

companies to raise funds.

On the basis of convertibility:

● Fully convertible Debentures (FCD): These are fully convertible into

Equity shares at the issuer's notice. The issuer decides the ratio of conversion.

Upon conversion the investors enjoy the same status as ordinary shareholders of

the company.

● Partly Convertible Debentures (PCD): A part of these instruments are

converted into Equity shares in the future at notice of the issuer. The issuer

decides the ratio for conversion. This is normally decided at the time of

subscription.

● Non-Convertible Debentures (NCD): These instruments retain the debt

character and cannot be converted in to equity shares.

● Optionally Convertible Debentures (OCD): The investor has the option

to either convert these debentures into shares at price decided by the

issuer/agreed upon at the time of issue.

On the basis of security:

● Secured Debentures: These instruments are secured by a charge on the

fixed assets of the issuer company. So if the issuer fails on payment of either the

principal or interest amount, his assets can be sold to repay the liability to the

investors.
 ● Unsecured Debentures: These instruments are unsecured in the sense

that if the issuer defaults on payment of the interest or principal amount, the

investor has to be along with other unsecured creditors of the company.

Along the dimension of security, we have seen that debenntures have been classified

into unsecured(Straight) and secured (mortgage) debentures. Unsecured debentures do

not carry any cahrge on specific assets of the company while secured debentures carry

a fixed or floating charges on assets of company.

The distinction between secured and unsecured debentures becomes relevant in case

the issuer defaults in payment of interest and principal amount so taken from investors.

Secured debenture holders are entitled to take possession of security given to them and

realize their dues by selling these assets, which are most commonly- land, buildings,

plant, machinery of business. This right is valuable to debenture holders provided

security is valuable, easily saleable and has not been simultaneously given as security

to other creditors as well. All these factors have to be examined while evaluating

debenture. Unsecured debenture are not backed by any such security, but an investor

needs not worry about that if he has a belief that company is doing financially and

chances of default are very bleak.

Advantages of Debentures

Continuing the classification of debentures, next step to be undertaken during course of

our analysis is to look at fact as to how debentures have an advantage over other

sources of long-term finance. In this section of our study, we shall look as to what are

the pros and cons of debentures that make it one of the most reliable sources of long-

term finance and also create a huge scope in Indian financial markets.

Following are advantages of debentures that make them a reliable source of finance as

compared to other long-term finance sources:

Let us divide our analysis into three major points i.e., division of advantages of

debentures by different prospective:

Let us now take a look at the description of above-mentioned topics in brief. During

course of description, efforts will be made to make sure that a reader understands

relative advantage of debentures and conclusions could be drawn out as to how under

utilized this very source of finance has been in Indian context:

General Advantages:

These advantages are highly dependable on the success rate of the current interest

rate and economic situation of society.

● Greater Returns on Corporate Debentures: Corporate bonds and

debentures are usually much more rewarding than government debentures or

bank investments and provide a higher rate of financial return for their investors.

If a company is selling debentures to people, it means that they definitely need

the money and are willing to pay you quite a bit of additional money to use it. The

fact of receiving a greater return on corporate debentures is a great advantage to

these types of investment.

● Financially Convertible: Another great advantage to debentures is that at

the end of the lending period companies usually offer the assets in the form of

stock, which can ultimately be very valuable. Stocks are another great form of

investment and are sometimes better than receiving immediate cash in return.

Although the advantages of debentures can be clearly seen, there are a number

risks and disadvantages to investing in corporate debentures.

● Success or Failure: You are taking a great risk when investing in a

corporate debenture because the success of the company will determine how
valuable your
 debenture is. A company debenture is only valuable when the company is

successful and profitable, but if it fails, then you will lose a great amount of

money. Debentures and bonds hold greater risks because the company could

eventually go out of business, so this type of investment should be done very

carefully.

Debentures can be a very attractive form of investment, but only should be taken

advantage of with companies that have a very high probability of being successful.

Large and already successful businesses are smart forms of investments when

considering buying corporate debentures.

Advantages to investors:

● They have the possibility to acquire shares at a lower price to that of the market-

by way of investment in convertible debentures with embedded options of

conversion into equity shares.

● They have the right for subscription of shares at a lower price to that of the
market.

● They are less exposed to the risks of inflation.

● The price of conversion is always lower to that of the market so the effects of a

possible inflation are mitigated. This inflation effects causes a rise on the stocks

quotations.

● Investors get better returns as compared to bank deposits.

● Debentures are less volatile as compared to equity shares.

● At times, companies come up with offers like principal guarantee.

● Due to SEBI guidelines, chances of default by corporate are very less.

 Advantages to issuing institutions:

● There is an improvement in the financial structure of the company, because the

extra resources (debentures) are transformed into own resources (shares). It

transforms debt into capital.

● The financial cost is lessening, because if the investor chooses for the

conversion they don’t have to obey the requisites from the debentures: to pay

interests and to refund the capital. On the other side, the interests from the

debentures or bonds are usually lower than that on the market, this way, in case

of not converting, the company will finance itself with cheap debt.

● The sooner the conversion is made, the greater are the discounts, so the lesser

are the numbers of shares that you can obtain with each debenture.

After talking about advantages of debentures, lets take a look on various demerits this

source of finance suffers from. No doubt that there are few cons from which debentures

suffer, but these demerits are small enough to overlook and advantages always override

the disadvantages: General Disadvantages:

● By issuing the debentures, the company accepts the risk of two types. These are

payment of the interest at a fixed rate, irrespective of the non-availability of profits

and repayment of principal amount at the pre-decided time. If earnings of the

company are not stable or if the demand for the products of the company is

highly elastic, debentures prove to be a very risky proposition for the company.

Any adverse change in the earnings or demand may prove to be fatal for the

company.
● Debentures are usually a secured source for raising the long-term requirement of

funds and usually the security offered to the investors is the fixed assets of the

company. A company, which requires less investment in fixed assets, such as a

trading company, may find debentures as a wrong source for raising the long-

term requirement of funds, as it does not have sufficient fixed assets to offer as

security.

Disadvantages for the Investor

● They don’t pass immediately through the quotations.

● The securities have a less quotation price due that temporarily they have lesser
rights.

● They are less liquid, due that there is a lesser amount of them.

● You can’t dispose of money soon due to the former explanation. Usually the type

of interests that they offer is inferior to that of the ordinary debentures due that

they offer the additional advantage of placing them as shares on the market.

Disadvantages for the Issuing Institution

● You can’t foresee an exact dividend distribution politic due that existing amounts

of shares swill depend on the number of debentures that will exercise their option

of conversion.

● There are doubts when you can’t calculate the interests of the debentures. Again,

the number of securities to be converted is unknown or unknown of the amount

of funds to be returned with the amortizations.

Legal Compliance while making issue of debentures:

The next step in our analysis will be to take a look at legal complications and

compliances that have to be kept in mind while issuing debentures. Being a company

secretary, one needs to keep in mind that this very professional is responsible for

complying all the legal and mandatory implications involved here. Being a part of good

corporate governance, a company secretary shall make efforts to make sure that no

point of law is not missed out by anyway possible. Other than this, a company secretary

shall be responsible for any discrepancies that might arise after issuance of debentures.

As a huge amount of public savings is involved in debentures, government and SEBI

have been stringent enough while formulating procedures and policies for issuing

guidelines. More than company’s interests, interests of investors have been given much

more weight while formulating rules and regulations of debenture issue. We shall look at

them in brief and that will help us in understanding role of a company secretary in

complying with directives issued by concerned authorities.

Issue of debentures to public:

Debentures which, include fully convertible debentures (FCDs), partly convertible

debentures (PCDs) or non-convertible debentures (NCDs) may be offered to the public

by prospectus by:

● An existing listed company

● Unlisted public company or a private company proposing to convert itself into

public company.

● A partnership firm proposing to transfer its business to a new public company.

Appointment of Merchant Banker and filing of draft prospectus:

For managing whole issue of debentures, a company is required to appoint a merchant

banker. As per the SEBI guidelines, a company is required to file a draft prospectus

with the SEBI though an eligible merchant banker, at least 21 days prior to filing of the

same with the registrar of companies. Any offer of securities to public shall be in

DEMAT mode. for this purpose, company shall enter into an agreement with a

depository before public issue is made.

Requirement of Credit Rating:

For issue of all types of debentures, credit ratings from a credit rating agency of not less

than investment grade shall be obtained from not less than two registered credit rating

agencies and disclosed in the offer documents.

In the case of public issue of debentures, there would be a large number of debenture

holders on the register of the company. As such it shall not be feasible to create charge

in favour of each of the debenture holder. A common methodology generally adopted is

to create Trust Deed conveying the property of the company. A Trust deed is an

arrangement enabling the property to be held by a person or persons for the benefit of

some other person known as beneficiary. The Trustees declare the Trust in favour of

the debenture holders. The Trust Deed may grant the Trustees fixed charge over the

freehold and leasehold property while a floating charge may be created over other

assets. The Company shall allow inspection of the Trust Deed and also provide copy of

the same to any member or debenture holder of the company on payment of such sum

as may be prescribed. Failure to provide the same would invite penalties by way of fine

under the Act. Any provision contained in the Trust Deed, which exempts a Trustee

from liability for breach of Trust, is void.

As per Section 125 (4) of the Indian Companies Act, registration of a charge for purpose

of issue of debentures is mandatory. Section 128 stipulates that where a company

issues series of debentures which is secured by charge, benefit of which will be

available to all debenture holders pari passu, the company shall file the prescribed

particulars in Form 10 and 13 with the Registrar of Companies for registration of charge.

These forms shall be filed within 30 days after the execution of the deed.

Appointment and Duties of Debenture Trustees

In terms of Section 117 B, it has been made mandatory for any company making a

public/rights 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.

Following will be eligible to act as debenture trustee if it is registered with SEBI:

● Scheduled Commercial Bank carrying on commercial activity.

● Public financial institution as per Section 4A of Indian Companies Act.

● Insurance company.

● Body Corporate.

The Debenture Trustees shall not:

a) Beneficially hold shares in a company.

b) Be beneficially entitled to monies, which are to be paid by the company to the

debenture trustees.

c) Enter into any guarantee in respect of principal debt secured by the debentures or

interest thereon.

This section also lists the functions that shall be performed by the Trustees. These
include:
 I. Protecting the interests of the debenture holders by addressing their
grievances.

II. Ensuring that the assets of the company issuing debentures are sufficient to

discharge the principal amount.

III. To ensure that the offer document does not contain any clause which is

inconsistent with the terms of the debentures or the Trust Deed.

IV. To ensure that the company does not commit any breach of the provisions of

the Trust Deed.

V. To take reasonable steps as may be necessary to undertake remedy in the

event of breach of any covenant in the Trust Deed.

VI. To convene a meeting of the debenture holders as and when required.

VII. If the debenture trustees are of the opinion that the assets of the company are

insufficient to discharge the principal amount, they shall file a petition before

the Central Government and the latter may after hearing the parties pass

such orders as is necessary in the interests of the debenture holders. As per

the SEBI (Debenture Trustees) Regulations, 1993, a Debenture Trustee can

be a scheduled bank, an insurance company, a body corporate or a public

financial institution.

Debenture Trust Deed

A Debenture Trust Deed shall, inter-alia, 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) Clauses that may make the security enforceable in the event of default in payment of

principal or interest i.e. appointment of receiver, foreclosure, sale of assets etc.

d) A clause giving the Trustees the power to take possession of the property charged

when security becomes enforceable.

e) Register of Debenture holders, meeting of all debenture holders and other

administrative matters may be included in the Deed.

In addition thereto, the SEBI regulations have laid format of the Trust Deed in Schedule

IV to the regulations. Some of the important provisions would include

f) Time limit of creation of security for issue of debentures.

g) Obligations of the body corporate towards the debenture holders.

h) Obligations towards the debenture holders - equity ratio and debt service coverage
ratio.

i) Procedure for the inspection of charged assets by the Trustees.

Creation of debenture Redemption Reserve

Section 117 C of the Act casts an obligation on the company to create a 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. The Act, however,

does not stipulate the time period for creation of security. SEBI regulations provides for

creation of security within six 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.
 Compliances under Registration Act and Stamp Duty Act

In the case of English Mortgage, the trust deed will attract ad valorem stamp duty. After

execution, such deed will be registered with the sub registrar of Assurances.

Registration charges will have to be paid in addition to the stamp duty. While in case of

an equitable mortgage, if no document, deed etc. is signed then nothing is required to

be registered with the sub registrar of Assurances. If however, a note or letter is made

then it will attract stamp duty. It is pertinent to mention that once a mortgage is created

by registration then no further stamp duty is payable on registration.

Listing of Debentures as per Section 73 of the Companies Act, 1956

A Listed Company, which proposes to issue debentures to the public, shall make the

debentures enlisted in a recognised Stock Exchange. It shall, before issuing the

prospectus for such issue, make the application to the Stock Exchange concerned and

the permission must be obtained before the expiry of ten weeks from the date of the

closing of the subscription.

Issue of Non Convertible Debentures and Approval of the Board

According to Section 292 of the Companies Act 1956, the proposal of a company to

issue debentures and issue the same to the public needs the prior approval of its Board

of Directors accorded by the resolution passed in the meeting of the Board. Such power

cannot be exercised by the resolution passed by the Directors by circulation, nor

delegated by the Board.

Issue of Partly Convertible Debentures or Fully Convertible Debentures

requires other approval

In this case approval of shareholders by special resolution and of the central

government pursuant to the provisions in Section 81 (3) (b) is required.

Conversion of Debentures into Equity Shares

In the normal course of conversion of Debentures into equity shares of the Company, a

company is needed to follow Section 81(3)(b) of the Companies Act,1956. On the other

hand, in the following cases the approval of Central Government will not be necessary:

● The Debentures are issued either raised through private subscription or issue of

a prospectus to the public

● A public financial institution or scheduled bank either underwrites the above issue

or subscribes to the issue of debentures, either wholly or in part or sanctions the

whole or part of the debenture; and

● The right of conversion may be at par or at a premium not exceeding 25% of the

nominal value of the shares.

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 three years and shall also be liable to fine of not less than Rs.500/- for

every day during which the default continues. (Section 117C) Further this offence is not

compoundable under section 621A of the Act.

There are contradictions between the Companies Act and the SEBI regulations on

issues relating to:

a) Utilisation of Debenture Redemption Reserves. The Act provides that the Debenture

Redemption Reserve will be used towards redemption of debentures only whereas the

SEBI regulation states that these will be a part of the General Reserves, which can be

utilised for the purpose of bonus issues.

b) Any debentures issued with a maturity period of 18 months or less is exempted from

the creation of Debenture Redemption Reserve Account, whereas no such exemption is

provided under the Companies Act.

c) No Public Issue/Rights Issue of Debentures shall be made by a company unless it

has appointed one or more Debenture Trustees for such debentures whereas under

SEBI guidelines, appointment of Debenture Trustees is compulsory only in case of

debentures with maturity of 18 months or more.

A listed company though subjected to SEBI regulations must comply with stringent

norms between the two legislations / regulations made there under.

Issue of Debentures in Private Companies

It is more often than naught experienced that modules, guidelines and study materials

are filled with all information relating to issue of debentures by a public company.

Interestingly, one fact is often neglected or overlooked that debentures are a

documentary evidence of a loan taken by company. A public company has an option of

going to public for raising funds by way of ownership and loans. A private company

cannot contact public for raising money as loans but it does not matter anyway that a

private company is refrained from issuing debentures as a debt instrument. Private

company can very well privately place debentures to financial institutions, commercial

banks, mutual funds and board of directors of that particular company. A secretarial

professional often finds himself in a dilemma when such kind of case comes before him.

In most often cases, a Company Secretary has to resort to bare acts-, which is indeed a

tedious task in its own self. Moreover, a company secretary shall not be confused with

basic functions he needs to perform during tenure of his work. Both as a practising

company secretary and as a financial manager in a corporate, he has to take care of the

fact that issuance of debentures in private company is one of the prime jobs he needs to

undertake.

Some of the provisions that are to be followed while making issue of debentures, in case
of a

private company are listed as follows:

1) A private company cannot issue unsecured debentures: Under the

Companies (Acceptance of Deposit) Rules, 1975 “any amount raised by issue of

debentures (including convertible debentures) secured by the mortgage of any

immovable property of the company and that the market value of the immovable
property secured is higher than the amount of debentures
issued” is not considered to be a Deposit. Under Section 3(1)(d) of the Act, a Private

Company is prohibited from accepting Deposit from persons other than its Directors,

Members and their

relatives. Hence, the Private Company must issue Debentures only as a Secured
Debenture.

2) Approvals to be taken before proceeding for the issue: The following

approvals are required to be obtained by the Company:

● Board for issue of Debentures under Section 292(1)(b).

● Board Creation / Declaration of Trust: Board Appointment of Debenture Trustees

(Section 117B)

● Board Approval of Draft Trust Deed

● Board Approval of the Form of Debenture Certificate.

● Letter from Trustees Consent from the Debenture Trustees to act as Trustees.

● No approvals are required to be obtained under Section 293(1)(a) and (d) since,

the Section does not apply to Private Limited Companies, unless it is a

Subsidiary of a Public Company.

3) Allotment: Since, the Company proposes to place the Debenture privately, it is

suggested that a Letter of Offer is also made which would be circulated amongst the

target buyers. The draft letter of offer is also required to be approved by the Board. The

conditions relating to the payment for subscription, the Security, the rate of interest on

the Debentures and the period by which the Debentures would be redeemed would

have to be specified.

4) Equitable Mortgage: The security is to be created by way of Equitable Mortgage

by way of deposit of title deeds of the immovable property of the Company. The deposit
is required to made with the Trustees. The procedure relating to this is as follows:
5) Filing of modification of charge with the registrar of Companies:

After creation of the Equitable Mortgage the Company should file Form 10.

6) Time Limit For Issue Of Debenture Certificate: The time limit for the issue

of Debenture Certificate is 3 months from the date of allotment. If the Company is of the

opinion that it might not be able to issue the Debenture Certificate within 3 months, then

it is suggested that an application is made to the CLB requesting for extending the time-

limit for issue of Debenture

Certificate.

7) Creation of debenture redemption reserve: As per Section 117C of the

Companies Act, 1956, a Debenture Redemption Reserve (DRR) needs to be created.

From the profits of the Company each year, adequate amounts need to credited, which

should be utilised for redemption, and not for any other purpose.

8) No necessity to file form 2 for allotment of debentures: We would like

to clarify that Form 2 -`Return of Allotment’ being a requirement under Section 75 of the

Companies Act is limited to allotment of shares and it does not in its scope cover

Allotment of Debentures.

9) Maintenance Of Register Of Debenture-Holders: Under Section 152 of

the Act, the Company is required to maintain a Register of Debenture-holder and we

append herewith the format of the Register:

10) Payment of stamp duty on the debentures: The stamp duty as

prescribed under the Stamp Act, as in force in state, required to be affixed to the

Debenture Certificate on the face of the same or in the form of attaching a separate

sheet of paper and affixing the stamps on the

same. The fact that the stamps so affixed forms part of the Certificate with the

Certificate Number should be mentioned on the sheet so attached.

Alternative method:

Instead of affixing stamps on the debenture certificate or by attaching a separate sheet,

there is also a provision to pay consolidated stamp duty. For this purpose, intimation is

needed to be given to concerned authorities by writing them official letters.

 Debentures and Debt market in Indian context:

After understanding in brief some of legal compliances related with issue of debentures

in public as well as private companies, we should conclude our analysis by taking a

look at current

economic conditions and implications of debentures in Indian financial structure.

It is very discouraging to see that debt market in India is not as organized as in other
advanced

economies. Taking example of the US, where debt market (bonds) has a size, which is

more that thrice the size of equity markets. In India, companies have been issuing

debentures to public as well as to financial institutions, but the level of issue has not

been as large as equity issue. Also there is no organization in Indian secondary debt

markets as compared to organized equity markets. In India, public at large averse

themselves from investing in debentures issued by large corporate houses. In most

cases, it is financial institutions, which invest in debentures of

corporate bodies. Public at large is interested in investing in debentures which are issued
by

financial institutions. In Indian markets there are about 8000 companies, which come

up with issues of securities. Out of them, only about 2000 are traded on stock

exchanges on a regular basis. Most often, there is a lack of liquidity in Indian stock

markets that lead to a disinterest by investors in debt instruments. This difference in

Indian scenario with that of advanced economy (USA) will become more clear by way

of following case analysis.

In this case illustration, we will take two companies from each nation: Reliance Industries

Limited from India and Wal-Mart Inc. from USA. We will see that both the companies

have significant effect on their respective economies and in a way they reflect financial
structure and pattern followed by investors in that nation. We will take into account

respective contribution of debt- bonds and debentures in total capital as well as total

liabilities of these companies. After

 this analysis, we will be in a position to draw conclusions of illustration as well as

make our recommendations on project and debentures’ scenario in Indian market.

Wal-Mart Inc.

USA: Long term Debt: $ 27,799 millions

Shareholder’s Equity: $64,608 millions

Total assets of continuing operations: $163,514 millions

(Sources of finance: Wal-Mart Inc. USA)

It is shown by way of above pie chart that Wal-Mart uses about 30% of debt in total

sources of finance raised by various methods. It means that bond markets in USA are

much more liquid and organized as compared to Indian markets whose condition will be

clear with help of following illustration:

Reliance Industries Limited:

India Shareholder’s Funds: Rs. 81,448.60 crores

Debentures: Rs. 4118.12 Crores

(Reliance Industries Limited: Sources of Long Term Finance)

This very illustration shows that debentures and bonds have not been able to win

confidence of investors in context of Indian Financial Market.

Conclusion of Analysis

It is not just about a single company, whole debt market of India needs reorganization

and that too at a rapid rate. In today’s context when due to recession, equity markets

have fallen drastically in India, debentures could just help in saving day for all troubled

financial markets of India. Apart from that, government should take account of SEBI’s

advices when the authority has constantly urged them to work for organization of debt

market in India. This is necessary

because in an emerging economy, it is important that there is an active participation of public

in corporate world activities. Role of a Company Secretary is important because in this

condition he’s the one who has to maintain equilibrium between interest of investors,

company and government of India. This is perhaps real challenge that a Company Secretary

will have to face in some years to come.