DEBENTURES

Under Section 2(12) debenture includes debenture stock, bonds and other securities of the company whether constitution a charge on the assets of the company or not. Debenture are bonds issued in acknowledgement of any indebtedness. Generally, however, they are issued under the companys seal and contain a provision for the repayment of principal sum at the appointed date and the payment of interest at fixed rate. Debentures are usually secures upon the companys property or undertaking.

Types of Debentures
Debentures may be of the following types: 1. Naked or unsecured debentures. 2. Secures debentures. 3. Redeemable debentures. 4. Perpetual debentures. 5. Bearer debentures. 6. Registered debentures.

1. Naked or unsecured debentures: Debentures that do not carry any charge on the assets of the company are known as naked or unsecured debentures. The holders of these debentures do not have any security as to repayment of principal or interest thereon. 2. Secures debentures: Debentures that are secures by a mortgage of the whole or part of the assets of the company are known as mortgage debentures or secures debentures. 3. Redeemable debentures: Debentures that are redeemable at the expiry of a certain period are known as redeemable debentures. Debentures once redeemed can be reissued in accordance with the provision of Section 121 of the Companies Act.

4. Perpetual debentures: where the debentures are redeemable on the happening of specified events which may not happen for an indefinite period, for example, winding up, they are known as perpetual debentures. 5. Bearer debentures: These debentures are payable to a bearer and are transferred by delivery and no stamp duty is payable on the transfer. The debenture holder is not registered in the books of the company but is entitled to claim interest and repayment of principle. A bona fide transferee for value is not affected by the defect in the title of the transferor. 6. Registered debentures: These debentures are payable to registered holders. A registered holder is one whose name appears on the debenture certificate/letter of allotment and is registered on the companys register of debenture holders maintained under Section 152 of the Companies Act, 1956.

Classification of debentures according to convertibility

According to convertibility, debentures are further classified into three categories: Fully convertible debentures (FCDs) Non-convertible debentures (NCDs) Partly convertible debentures (PCDs)

1. Fully convertible debentures: Convertible debentures are those which are converted into equity shares of the company on the expiry of specified period or periods. Where the conversion is to be made at or after 18 months from the date of allotment but before 36 months, the conversion is optional on the debentures holders in terms of S.E.B.I. guidelines. Convertible debentures may or may not carry any interest. 2. Non- convertible debentures: Non-convertible debentures are those debentures that do not confer any option on the holder to convert the debentures into equity shares and are redeemed at the expiry of a specified period(s).

3. Partly convertible debentures: Partly convertible debentures consists of two parts convertible and non-convertible. The convertible portion(s) is/are convertible into equity shares at the expiry of specified period(s), whereas the non-convertible portion is redeemed at the expiry of a certain period(s). where the conversion takes place at or after 18 months, the conversion is optional at the debenture holder.

Distinction between fully and partly convertible debentures:

1. Classification for debt Equity ratio computation : Classified as equity for debt equity for computation .

Convertible portion classified as equity and non-convertible portion as debt.

Favourable debt equity ratio. Partly convertible

2. Flexibility in financing: Highly favourable debt equity ratio .

Feature : Fully convertible

3. Capital base: Higher equity capital on Conversion of debentures. 4. Suitability: Better suited for companies Without established track record.

Relatively lower equity Capital on conversion of Debenture.

Better suited for companies With established track record.

5. Debenture redemption Reserve: Not required.

Required to be created for 50% of the face value of the Nonconvertible portion.

6. Popularity: Highly popular with investors.

Not so popular with investors.

Debenture Certificate:

Section 113 of the Companies Act, 1956 provides that every company shall, within three months of allotment of any of its shares, debentures or debenture stock and within two months after the application for registration of the transfer of any such debentures or debenture stock, deliver the certificates of all debentures and debenture stock allotted or transferred in accordance with the procedure laid down in section 53 of the Companies Act, 1956. However, the C.L.B. may extend the period within which the debentures certificate may be delivered to a further period not exceeding nine moths, if it is satisfied that it is not possible for the company to deliver the certificates within the said period.

If default is made in complying with the above provisions, every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years and the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 5,000 per day of default.

SEBI GUIDELINES FOR ISSUE OF DEBT INDTRUMENTS

1. 3. 4. 5. 6. 7. 8. 9.

2.

Requirement of credit rating Requirement in respect of debenture trustee Creation of debentures redemption reserve Distribution of dividends Redemption Disclosure and creation of charge Requirement of letter of option Other requirements Additional disclosures in respect of debentures