Chapter 2 A an Issue of Prospectus by Corporation/Company Meaning of Corporation The word ‘Corporation’ derives from the Latin word ‘corpus’ means “body’ora ‘body of people’, According to Chief Justice Marshall, “A Corporation isan artificial, being, invisible, intangible and existing only in contemplation of law. Being, the mere creature of law it possesses only those properties which the character of its creation confers u Pon it, either expressly or as incidental to ‘d. Among the most Important ones, immorality, allowed, individuality; and if the expression may Properties by which a perpetual succession of many s the same, and may act as a single individual. They gnage its own affairs, and to hold property without s, the hazardous and endless necessity, or perpetual Pose of transmitting it from hand to hand. It is chiefly ng bodies of men, in Succession with these qualities and the perflexing intricacie conveyances for the pur for the purpose of clothin ‘he particular object, like one immortal being.” InAmerican English, the word ‘Corporation’ is most often used to describe business corporations. In British English, the term ‘Company’ is more widely used to describe the same sort of entity while the word Corporation encompasses all incorporated entities, In American English, the word ‘Company’ can include entities such as Partnership that would not be referred to as companies in British English as they are not a separate legal entity, InIndia, we follow the English traditi Company or group of people authorized to and recognized as such in law. A Corporati elect its Board of Directors to oversee t As per Section (42 of 1956) Cory ions. Accordingly, a Corporation isa actasa single entity (legally a person) ion is owned by its shareholders, who the Company. 2Caa) of the Securities Contracts (Regulation) Act, 1956 Poration’ means the succession of a recognised stock ), by another stock exchange, being a Company urpose of assisting, tegulating or controlling the business lealing in securities carried on by such individuals or society. incorporated forthe p ofbuying, selling or d 9[Unit-1,Chy ities 40 Law of Investments and Securt Corporate Security hi a. ae resents an Ownership Corporate security is a financial instrument that ae issues the security Position in a publicly-traded Corporation (stock). The Co” mmon and preferred. A Corporation generally issues two types of stock: con an : i are owne Registered Corporations have legal personality ee ee Bes shareholders, whose liability is limited to their investment. Pe ie typically actively manage a Corporation, shareholders instead ele Ae PI Board of Directors to control the Corporation in a fiduciary capacity. lectin af Dencnactie hua Camnanu/CornorationN Chapter 15 to tenia MEE een Definition of ‘Debenture’ i an ofthe term ‘debenture in law. Palmer: defines encing a debt, the essence of; s", According t0 Topham, debenture is . ¢ of a debt to the holder, usuayp, secured by the charge". Thus, 4 There isino exact definition adebenture as "an instrument un being the admission of indebtednes: see "document given by @ company as eviden ymmonly arising out of a loan and most co! i ; cee isa certificate of loan issued by a company. It isa type of security, jp ig a document which either creates & debt or ae According to Section 2(30) of the Companies ae 3 Bs debenture includes debenture stock, bonds or any other tere ae ale evidencing adebt, whether constituting a charge on the assets of the company or not, In Laxman Bharamji¥. Emperor [AIR 1946 Bom. 18], a company issued certain document for money, the documents bore serial numbers, acknowledged ‘debt and provided for payment of interest by determining lucky number, the court held them to be debentures despite the fact that they were described as patron bonds. Thus, to determine whether a particular document issued bya company is debenture or not, the court looks at the substance of the transaction. In Levy v. Abercorris State & Co. [(1887) 37 Ch D 260, 264] Chitty J defined thus: "Debenture” means a document which either creates a debt or acknowledges it, and any document which fulfils either of these conditions isa debenture. In Lemon v. Austin Friars Investment Trust Ltd., (1926) Ch. 1 (C.A)}, debenture was defined thus: "A debenture is a document containing 0 acknowledgement of indebtedness which need not be, although it usually is, under seal, which need not give, although it usually does give, a charge on the a of the company, by way of security, and which may or may not be one of series". der seal evid Debentures are commonly issued ina imi! is manner similar to the issue of shares trough a prospects The amount might be payable by instalments on application, lent and calls, But usually the amount is payable in one lump sum. 2. Debenture v, Share (1) Shares are part of the ca alloan, ital of the company where as debentures constitu (2) Shareholders are the owners of tl are creditors ofthe company, he company whereas debenture hold#* 102 |ch-10] Debentures sit lers enjoy voting rights 5s arehold r cu Yy 2 rights Where as debe 103 @ ny voting right: NUKE holders de a . * Not ha widens cane Paid 10 the shareholder fmve But, interest on debentures is pays Only out of the Profits of the ATE No profits, Company but 4) " @ company: ayable o pentures: generally have a charge on tf shares do not carry any such charge, Ven if there Ne assets of the g The rate of eer is fixed in case of debentures yh ivi ay vary fr wi shares the dividend may vary from year-to-year, here as an equity terest on debentures gets priority over dividend onsh shares, 3, Features or Characteristics of Debey cbenture are as follows: a nUre:— The Cy features of ad The Characteristic re is usually in the form of ; ps 1) Adebenture is usua lorm of a certificate issu the company. In other words, it is an instrument in Sin nes eal of tificate of debenture is g q Q The cert generally an acknor indebtedness Wledgement of G) Itis issued under the company's seal. It need not, however, be necessa under the company's seal. ry (4) Itis one of a series issued to a number of lenders. But a single debenture may be issued to one man. (5) Itusually specifies a particular period or date as the date of repayment. Buta company may issue irredeemable debentures with no undertaking to repay. It also provides for the payment of a specified principal and interest at the specified date. (6) It generally creates a charge on the undertaking of the company or some parts of its property; but there may be debentures without any such charge. (1) Each debenture is numbered. (8) Debentures carry no voting rights at any 1 These are the usual but not essential or compulsory features. ified 4. Kinds or classes of Debentures:— Debentures my be classifi an jority. onthe basis of negotiabili ity, permanence, convertibility, and pr of negotiability, security, P 1 the basis of pilityi— O to nego es eamely beat? meeting of the company (Sec. 71). ate Classification according to nego, os el rability, debentures can be classified into ( ‘lures and registered debentures. *) Bearer Debentures:- These debentures are also Ge hey are called debentures’ As these debentures are pay@ ol delive! and b0 earer dehentrect Thace can be transferre' by mere as «unregisteredwy sChaty Jide transferee for value is not affected by the defect in the title of prior holder. These are regarded as negotiable instrumen's: the It has been held by the Caleutta High Court #0 Calcutta Safe Depy Co. Ltd., v. Ranjit Mathuradas Sampat ((197!) 4° Comp Cas 1063 Cath thy a person to whom a bearer instrument is transferred becomes its holder Section 118 of the Negotiable Instruments Act applics and, therefore, every holder of, bearer debenture is presumed to be a holder in due course nice the contra is shown, If the payment is denied to him, he will be entitled to all the rights op acreditor. (b) Registered Debentures: Debentiret which are payable only to registereg holders are called "registered debentures.” A holder is one whose nang appears both on the debenture certificateand in the company’s register of debentures. The registered holders of the debentures can transfer them jn open market like shares, but d transfer to be complete has to be registered Quth the company. It should further be noted that these debentures arg transferable in the manner specified in the conditions endorsed thereon, Registered debentures are not negotiable instruments. II. Classification according to security:— On the basis of security, debentures can be classified as unsecured debenture and secure debenture, “These securities are also called ‘Simple or naked secured by any charge on the assets 'd debentures. In such a case the of the company for 104 Law of Investments and Securities [Unit-y, (a) Unsecure Debentures: debentures’. Debentures which are not of the company are called unsecure debenture holder is an ordinary unsecured credito recovery of the debt. (b) Secured Debenture:— Debentures which are issued with a charge on the assets of the company are called “secured debentures’. These are also called ‘mortgage debentures’. The charge may bea fixed charge ora floating charge. IIL. Classification according to permanence:— On the basis of permanence, debentures can be classified as redeemable debentures and irredeemable or perpetual debentures. Redeemable Debentures:— Debentures which are repayable after 4 ceftain period are called ‘redeemable debentures’. On the expiry of the term of the loan the company has the right to pay back the debenture - holders. Redeemed debentures can be re-issued. Upon such re-issue the debenture-holder will have the same rights and priorities as if the debentures had not been redeemed. C1¥) Classification according to convertibility:— On the basis o convertibility, debenturer are classified as ible ¢ d 008" i an convertible debentures. sanyer sible Seber aUnit-I,Ch-10] Debentures 105 (a) Convertible lebentures:— These de holders to covert them into preference o1 exchange, afier a certa bentures give an option to the 1 they cease to be lenders to the comp; T equity shares at Stated rates of Fully convertible debentures ar , equity shares of the company on th - fat are converted into conversion is to be made at or after 18 Months from the date of allot bi before 36 months. As per SEBI guidelines, conversion is options n> ofthe debenture holders convertible debenture may or may not earty ene te Partly convertible debentures consist of two parts i.e, Sone eaten convertible. Whereas non-convertible Portion is redeemed at the expi rat _ certain period. When conversion takes ph pry t i, ‘ace at or after 18 months, conversion is optional at the discretion of debentures holders, (aa) Distinction between Eully Convertible Debentures (FCDs) and Partly Convertible Debentures (PCDs):— (1) Incase of FCDs, on conversion of debentures, will be high equity capital and in case of PCDs, there will be relatively low equity capital on conversion, (2) FCDs are better suited for Companies without established track record while PCDs are better suited for companies with established track record, (3) Debenture redemption reserve is required to be created for 50% of the face value of the non-convertible portion in case of PCDs. But, such a Teserve is not acquired in case of FCDs, (4) In case of PCDs, buy-back arrangements may be made for buy-back ofnon-convertible portion of the debentures. Whereas buy-back arrangements are not required in case of FCDs. (5) FCDs are highly popular with investors. While PCDs are not so popular with investors, (6) FCDs are classified as equity for debt-equity computation, In case of PCDs, convertible portion is classified as ‘equity’ and non-convertible portion as ‘debt’, i (7) In case of FCDs there is higher burden of servicing of equity while in “ase of PCDs there is relatively lesser burden of equity servicing. ny , t give ar () Non-convertible debentures:— These Co ee They option to their holders to convert them into preference or ed aT€ to be duly paid as and when they mature. (V) Classification according to priority: , ‘ntures may be classified as first debentures an +— On the basis of priority, S \d second debentures. er> v" 106 Law of Investments and Securities [Unit., Ch. Chay the debentures which are to be (1) First Debenture:— These are quently issued, in priority to other debentures which may be subse (2) Second Debenture:— These are the debentures which are to he Pai after the ‘first debentures’ have been redeemed. id Tepaig Nature of debentures Asper Section 44 of the Companies shall be movable property transferable in the company. Provisions relating to (1) A company may issue deben! debentures into shares, either wholly or ntures with an option to convert such shall be approved by a special resolution Act, 2013, the debentures in compan, the manner provided by the articles, of ‘debentures’ (Sec. 71) tures with an option to convert such partly at the time of redemption: Provided that the issue of debe debentures into shares, wholly or partly, passed at a general meeting. (2) No company shall issue any debentures carrying any voting rights. (3) Secured debentures may be issued by a company subject to such terms and conditions as may be prescribed. (4) Where debentures are issued by a company under this section, the company shall create a debenture redemption reserve account out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilised by the company except for the redemption of debentures. (5)No company shall issue a prospectus or make an o! the public or to its members exceeding five hundred for the si debentures, unless the company has, before such issue or offer, appointed one or more debenture trustees and the conditions governing the appointment of such trustees shall be such as may be prescribed. ffer or invitation to subscription of its of the (6) A debenture trustee shall take steps to protect the interests h rules debenture-holders and redress their grievances in accordance with suc! as may be prescribed. (7) Any provision contained in a trust deed for securing the issu® of debentures, or in any contract with the debenture-holders secured by @ trust deed, shall be void in so far as it would have the effect of exempting @ trustee thereof from, or indemnifying him against, any liability for breach of trust, where he fails to show the degree of care and due diligence required of him as ® trustee, having regard to the provisions of the trust deed conferring on him any power, authority or discretion: | | | | .* 107 aes eG) Debentures peed that the liability of the debenture trustee shall be subject to such ea may be agreed upon by a majority of debenture-holders holding hree- i seting held fc the purpose. ree-fourths in value of the total debentures at a meeting held for (8)A compan ; with the tee an Shall pay interest and redeem the debentures in accordance and conditions of their issue. (9) Where at i the assets of the ee the debenture trustee comes to 4 conclusion that discharge the principal yare insufficient or are likely to become insufficient to trustee may file a petition b cunt as and when it becomes due, the debenture ocean areata ie the Tribunal and the Tribunal may, after hearing such restrictions Gn the inc i" Person interested in the matter, by order, impose Tribunal may conside ting of any further liabilities by the company as the r necessary in the interests of the debenture-holders. (10) Where a company fails to redeem the de e date i maturity or fails to pay interest on the ae eae ae Sara may, on the application of any or all of the debenture-holders, ‘or debenture trustee and, after hearing the parties concerned, direct, by order, the company to redeem the debentures forthwith on payment of principal and interest due thereon. (11) If any default is made in complying with the order of the Tribunal under this section, every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be Jess than two lakh rupees but which may extend to five lakh rupees, OF with both. the company to take up forced by a decree for s| prescribe the procedure, for securing, nture trust deed, the procedure for the in copies thereof, quantum and such other matters. (12) A contract with and pay for any debentures of the company may be en pecific performance. (13) The Central Government may the issue of debentures, the form of debe Ic debenture-holders to inspect the trust deed and to obra of debenture redemption reserve required to be create sm . - caminate. iN