Debentures

(The companies (share capital and debentures) Rules,2014)

Definition u/s 2(30) - "Debenture" includes debenture stock, bonds and any other instrument evidence
a debt, whether constituting a charge on the assets of the company or not.

Features of Debentures (Rule 18) –

 Secured loans.
 Assets/property has charge on it.
 Fixed rate of interest
 No restriction for issue of debentures at discount
 Payment of interest, even if there is no profits
 Debenture certificate shall be issued within 6months of allotment
 At the time of winding up priority is given to debenture holders.
 It is of long term.
 Option of convertible.
 No voting rights.

Types of debentures:

1. Registered debenture or bearer debenture (based on negotiability)

2. Secured or unsecured debenture r naked debenture (based on security)
3. Redeemable and irredeemable debenture (based on redeem ability)
4. Convertible and non-convertible debenture (based on convertibility)
5. First debenture and second debentures (based on priority)

Terms of issue of Debenture

1. Debentures with Pari-Passu clause – The term ‘Pari-Passu’ means ranking equally amongst
themselves. Every holder of debentures issued with ‘Pari-Passu’ clause shall be entitled to share
the proceeds of the security realized, even though these debentures were issued at different
points in time.
2. Debentures without Pari-Passu clause – The Debentures shall rank according to the dates of
issue of debentures i.e., debentures issued first shall have priority over the debentures issued
afterwards. (If issued on same dates then ranking shall be done based on serial number of
debentures issued).
3. Restrictions on powers of the company – A company is not entitled to issue a new series of
debentures –
a. Which has a priority over an earlier series of debentures, or
b. Ranking ‘Pari-Passu’ with an earlier series of debentures.
Unless such right is expressly reserved under the terms and conditions of earlier series
of debentures.

Debentures Trust Deed (Rule 18)–

a) The debenture trust deed shall be in such form prescribed by Central Government and shall be
executed within such period as may be prescribed by Central Government.

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b) Execute Trust Deed within 60 days of allotting debenture in Form No SH 12
c) The security for the debentures by way of a charge or mortgage can be on both movable and
immovable property.
d) The company conveys the property to be given as security in favour of a trust by creating a
debenture trust deed to be maintained by debenture holders are beneficiary.
e) The debenture trustee have the following powers:
i. To safeguard the interest of debenture holders
ii. To create a charge on the properties secured
iii. To sell or lease. (in case of default by company to repay debenture holders)
iv. To address the grievances (complaints) of debenture holders.
v. To exercise such other powers as provided in the debenture trust deed.
f) The debenture trustee shall be appointed by company and named in prospectus.
g) Written consent letter such trustee before appointment to be obtained.
h) A person is disqualified in becoming a debenture trustee if he has any interest in the company in
the form of :
i. Holding shares
ii. Is a promoter, Key Managerial Personnel of company
iii. Indebted to the company, its subsidiary, holding or associate company
iv. Furnished any guarantee
v. Pecuniary relationship-of 2% or more of gross turnover/total income OR 50 lac whichever is
less during last 2 years or current year
vi. Relative of promoter or person employed in the company
i) If the debenture trustee is of the opinion that the assets of the company are insufficient to
discharge the principal amount the debenture trustee may file a petition to the tribunal and the
tribunal may impose such restrictions as required.
j) Meeting of debenture holders will be convened if,
i. Requisition in writing signed by debenture holders holding at least 1/10 th in value of the
debenture holders.
ii. The happening of any event, which constitutes a breach, default or which in the opinion of
the debenture trustees, affects the interest of the debenture holders.
k) A contract with the company to take up and pay for any debentures of the company may be
enforced by a decree for specific performance.
l) Application to the tribunal by the trustee or debenture holder can be made in case the company
fails to redeem the debenture to pass a necessary order to direct the company to make the
payment.
Debenture Trustees (Section 71)
1. Appointment of debenture trustee(s) is mandatory when debentures are issued to public by
prospectus.
2. Appointment of trustee(s) should be before the issue of prospectus.
3. When debentures are issued by prospectus his consent shall be obtained and prospectus
should contain such facts.

Disqualifications

1. Member of the company cannot be appointed as trustee.

2. Creditors of the company cannot be appointed.
3. Any person, who has given a guarantee on repayment of debentures or interest thereon, cannot
be appointed as a trustee.

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Functions of trustee
1. To protect the interest of debenture holders.
2. Create security within prescribed time.
3. Address the grievances of debenture holders to the company.
4. Call meetings of debenture holders whenever necessary.
5. Debenture trustee should ensure that the assets of the company are sufficient to discharge
the debentures and also they must ensure that there is no breach of trust while forming the
trust deed.
6. Debenture trustees must ensure that prospectus does not contain any matter which is
inconsistent with the terms of debenture trust deed.

Note: When assets are insufficient or likely to be insufficient to discharge the principle amount when
due, the debenture trustee(s) may apply to Company Law Board / NCLT.

Liability of Company to create Security and Debenture Redemption Reserve :(sec 71(4)) R/W rule 28

1. It is mandatory for a company which issues debentures to create Debenture Redemption

Reserve.
2. Adequate amount shall be credited to Debenture Redemption Reserve out of profits of the
company until debentures are redeemed.
3. The Debenture Redemption Reserve shall be utilized only for Redemption of Debentures.
4. Every company required to create Debenture Redemption Reserve shall on or before 30 th April
in each year, invest or deposit, not less than 15% of the amount of its debentures maturing
during the year ending on 31 st March of the next year, in deposits with scheduled banks, bonds
and securities of state and central government notified in this regard.

Statutory provisions relating to Debenture (sec 71):

a) A company may issue debentures with an option of converting them into equity shares, fully or
partly but such conversion is only possible by passing special resolution.
b) No company shall issue any debentures carrying voting rights at any meeting of the company
c) Every debenture holder is entitled to a copy of the debenture trust deed within 7days of making
a request for such deed
d) Every company must keep a register of debenture holder in the same manner as the register of
members
e) Any debenture holder shall on demand be entitled to be furnished free of cost, with a copy of
the last balance sheet of the company, profit and loss account and auditors’ report and such
other documents(annual report).

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