Date post: | 05-Apr-2018 |
Category: |
Documents |
Upload: | abhay-dangash |
View: | 228 times |
Download: | 0 times |
of 27
7/31/2019 All About Debentures
1/27
DEBENTURES IN US CONTEXT SIMPLY MEANS
UNSECURED BOND,
WHERAS IN INDIAN CONTEXT DEBENTURE MAY BE
SECURED OR UNSECURED(AND GENERALLY IT IS
SECURED) .
------------ABHAY
Corporate/Company Law
Fox Mandal & Associate, Bangalore (A part of FoxMandalLittle Group)
India: All About Debentures, An Appraisal
15 June 2010
Article by D. K. Prahlada Rao
1. Introduction:
Debenture includes debenture stock, bonds and any other
securities of a company whether constituting a charge on the
7/31/2019 All About Debentures
2/27
assets of a company or not as defined in section 2(12) of the
Companies Act, 1956 ("the Act"). This is an inclusive definition
and amounts to borrowing of monies from the holders of
debentures on such terms and conditions subject to which thedebentures have been issued. Basically the debenture is
represented by a document or certificate signed by the
authorized officers of a company acknowledging money lent and
guaranteeing repayment with interest and with or without
security on the assets of the company for due performance of its
obligation. This is a debt instrument and is the commonestmethod of raising loan capital at a lower cost, as part of project
financing or for any other purposes.
Debentures may be redeemable as envisaged in the Act or
mandatorily convertible wholly into the equity shares of a
company as envisaged under FEMA. While the articles of a
company should contain an enabling provision for issue ofdebentures and creation of security thereof by the Board, the
quantum of such issue should be adequately covered by a
borrowing resolution of its shareholders under section 293(1)(d)
of the Act. Debentures may be fully or partly convertible or non
convertible as per the terms of the issue.
2. Issue of Debentures & creation of Security:A company which issues debentures is under an obligation to
create security thereof pursuant to section 117A of the Act by
executing a trust deed. The need for executing a trust deed will
arise when a company wants to issue a prospectus or letter of
7/31/2019 All About Debentures
3/27
offer to the public for securing subscription to its debentures and
for this purpose appoint one or more Debenture Trustees.The
trust deed should state that the Debenture Trustees have
consented to be appointed as such as required by section 117Bof the Act. Thus a Debenture Trustee enjoys a unique position of
being an independent entity unconnected with the issuer of
security but none- the- less appointed to protect the interest of
holders of debentures.
3. Qualification for Appointment of Debenture Trustee:
All and sundry cannot be appointed as Debenture Trustees. A
person holding beneficially shares in the issuer company or
beneficially entitled to receive moneys from that company and
has provided any guarantee in respect of principal debts secured
by the debentures or interest thereon as specified in section
117B of the Act. SEBI (Debenture Trustee) Regulations, 1993
additionally prescribe that no person shall be entitled to act asDebenture Trustee unless he is either a scheduled bank carrying
on commercial activity or a public financial institution within
the meaning of section 4A of the Act or an insurance company
or a body corporate. It is also necessary that such an entity
should have capital adequacy of net worth of one crore of rupees
and have been licensed by SEBI to act as a Debenture Trustee.4. Functional Role of Debenture Trustee:
The Debenture Trustee is an intermediary between the issuer of
debentures and the holders of debentures. Accordingly the main
7/31/2019 All About Debentures
4/27
responsibility of debenture trustee is to protect the interest of
holders of debentures including creation of adequate security by
the company issuing the debentures and to redress their
grievances. He may also take such steps as he deems fit to:
Under the Act:
a. ensure on a continuous basis that the assets o f the company
issuing debentures and each of the guarantors are sufficient to
discharge the principal amount and the interest at all times;
b. to satisfy himself that the prospectus or the letter of offerdoes not contain any matter which is inconsistent with the terms
of debentures or with the trust deed;
c. to ensure that the company does not commit any breach of
covenants and provisions of the trust deed;
d. to take such reasonable steps to remedy any breach of the
covenants of the trust deed or the terms of issue of the
debentures;
e. to take steps to call a meeting of holders of debentures as
and when such meeting is required to be held.
Needless to say, that the aforesaid responsibilities are intended
to protect the interest of the debenture holders. One of theaforesaid requirements relate to adequacy of security so that in
the event of failure of issuer of security to redeem the
debentures, (which is an event of default) the Debenture Trustee
7/31/2019 All About Debentures
5/27
should enforce the security and pay off the debenture holders by
disposing off the secured assets.
Under aforesaid Regulation:
Regulation 15 of aforesaid Regulation prescribes the duties of
the Debenture Trustee, inter alia, as under:
a. call for periodical reports from the body corporate i.e.
issuer of debentures;
b. take possession of trust property in accordance with the
provisions of the trust deed;
c. enforce security in the interest of the debenture holders;
d. ascertain and satisfy on a continuous basis that the property
charged to the debentures is available and adequate at all times
to discharge the interest and principal amount payable in respect
of the debentures and that such property is free from any otherencumbrances save and except those which are specifically
agreed to by the debenture trustee;
e. exercise due diligence to ensure compliance by the body
corporate with the provisions of the Act, the listing agreement of
the stock exchange or the trust deed;
f. to take appropriate measures for protecting the interest of
the debenture holders as soon as any breach of the trust deed or
law comes to his notice;
7/31/2019 All About Debentures
6/27
g. to ascertain that the debentures have been converted or
redeemed in accordance with the provisions and conditions
under which they are offered to the debenture holders;
h. inform the Board immediately of any breach of trust deed
or provision of any law;
i. appoint a nominee director on the board of the body
corporate in the event of:-
j. i) two consecutive defaults in payment of interest to the
debenture holders; or
ii) default in creation of security for debentures, or
iii) default in redemption of debentures.
k. no debenture trustee shall relinquish its assignments as
debenture trustee in respect of the debenture issue of any body
corporate, unless and until another debenture trustee isappointed in its place by the body corporate.
Regulation 17A of the aforesaid Regulation provides that every
debenture trustee should appoint a "compliance officer" and he
shall be responsible for monitoring the compliance of the Act,
rules and regulations, notifications etc issued by the Board or the
Central Government for redressal of investor's grievances. Thusa Debenture Trustee occupies a pivotal position of trust and
confidence between the company which issues debentures and
the debenture holders who subscribe to the debentures. ulations
7/31/2019 All About Debentures
7/27
and he shall be responsible for monitoring teh snditions under
which they are offered
5.Contents of the Debenture Trustee Agreement:
Schedule IV to the aforesaid Regulation lists some of the clauses
which are to be included in the Debenture Trustee Agreement.
They are:
a. Preamble
b. Description of the Instrument
c. Details of charged securities i.e.
d.
i. nature of charge
ii. examination of title
iii. rank of the charge i.e. whether first, second, or pari passucharge etc
iv. charging of future assets
v. time limit for creation of charge
vi. minimum security cover required
vii. valuation of security
viii. circumstances in which security becomes enforceable
ix. method and preservation of secured property etc
7/31/2019 All About Debentures
8/27
e. Events of default
f. Rights of Debenture Trustee
g. Obligations of the body corporate (i.e. Issuer of debentures)
Apart from the above, the Debenture Trustee Agreement will
have to include the following provisions:
i. Definition and Interpretation
ii. Appointment of Debenture trustee and its powers
iii. Remuneration of Debenture Trustee
iv. Appointment of debenture Trustee as Attorney
v. Negative pledge i.e. not to creation additional
encumbrances on the secured asset,
vi. Description of Events of Default, this may arise due to non-
payment to debenture holders, breach of any undertaking,avoidance or repudiation
vii. Notice of exercise of trustee powers
viii. Indemnity of trustee
ix. Retirement of trustee & appointment of new trustee
x. Reimbursement of expenses incurred by the trustee
xi. General covenants etc
6. Who can appoint Debenture Trustee?
7/31/2019 All About Debentures
9/27
Creation of security means mortgaging or charging the property
in favor of Debenture Trustee for the benefit of debenture
holders. This is an incidence of ownership of property and
creation of security has to be done by the owner of the property.However, the debenture holders are beneficiaries and they have
no access to mortgaged property. The Debenture Trustee holds
the secured property on behalf of issuer of security and for
benefit of debenture holders. In the event of default by the issuer
of security, the Debenture Trustee will have the power and
authority to bring the secured property to sale following theprocedure in the Transfer of property Act, 1882 and the
proceeds of sale will have to be applied to redeem the
debentures. This is one of the onus conferred on the Debenture
Trustee by the aforesaid regulation. Effective use of this power
is possible if it is included in the Debenture Trustee Agreement
and a suitable power of attorney is executed by the issuer of
debentures in favor of Debenture Trustee. This document has to
be executed as a trust deed and not as a Mortgage deed or bond.
7. What if the debenture holder is a non-resident?
These days' big real estate development projects are financed by
international banking Institutions under the Special Economic
Zone (SEZ) by subscribing to mandatorily convertibledebentures, as required under the FEMA. In such an event if the
debenture holder is a non-resident, he cannot hold the mortgaged
property as FEMA regulation prohibits a non-resident holding
an immovable property in India. Definition of "transfer" in
7/31/2019 All About Debentures
10/27
section 2(ze) of FEMA includes sale, purchase, exchange,
mortgage, pledge, gift, loan or any other form of transfer of
right, title, possession or lien. However, a non-resident
debenture holder requires back up security till his debentures areconverted into the equity shares of the Indian company. This can
be achieved by appointing a Debenture Trustee so that he will be
able to hold the secured property for the benefit of non-resident
debenture holder. This does not attract FEMA provisions as the
secured property is held by an Indian entity on behalf of an
Indian company. Even the sale of secured property by thedebenture Trustee, in the event of default by the Indian company
will not attract FEMA provisions as the transaction will take
place in India without the involvement of non-resident debenture
holder. However remittance of sale proceeds to the non-resident
debenture holder involves FEMA scanner and debenture age and
will have to be routed through the authorized dealer in foreign
exchange as there is no automatic capital convertibility.
8. Should Debentures be fully secured?
This is one of the vexed issue regarding the issue of debentures.
There is divergence of views in this regard. Debenture is defined
in Sec 2(12) of the Act as including debenture stock, bonds and
any other securities of a company whether constituting a chargeon the assets of the company or not. This is an inclusive
definition .and does not define what is debenture. Of course in
commercial parlance it is generally understood as borrowing of
7/31/2019 All About Debentures
11/27
funds under certain terms and conditions represented by the
debenture certificate.
The definition of "debenture" enacted in the year 1956 when the
present Act came on the statute book creates an impression that
a debenture may or may not be secured. It follows from this if it
is secured, the provisions of section 125 of the Act will apply
requiring registration of charge with the ROC. If it is not
secured, then it will not get the benefit as an exempt deposit.
Under Rule 2(b)(x) of the Companies (Acceptance of Deposits)
Act, 1975 and Part 3 of the Return of Deposits (which lists outparticulars of exempt borrowings etc not considered as deposits)
item 9 thereof describes "money received by issue of debentures
secured by mortgage of immovable properties or convertible
debentures is shown as exempt deposit".
9. What are the consequences of issuing unsecured debentures?
A plain reading of sections 117A and 117B of the Act makes it
clear that creation of security is a must in the case of issue of
prospectus and letter of offer to the public.. Where no charge is
created the issuer company will have to comply with the
provisions of the Companies (Acceptance of Deposits) Rules,
1975 as unsecured debentures\bonds are treated as "deposits".
SEBI revised guidelines is silent on this aspect but none-the-lessthe provisions of the Act will apply to the listed companies.
The NBFC Acceptance of Public Deposits (Reserve Bank)
Directions, 1998 provide that "any amount received as hybrid
7/31/2019 All About Debentures
12/27
debt or subordinated debt the minimum maturity Period of
which is not less than 60 months" is an exempt deposit.
The Companies (Amendment) Act, 2000 which came into force
from13-12-2000 has introduced a few special Provisions
exclusively applicable to debentures in sections 117 to 123 to
the Act. A trust deed for securing any issue of debentures is
required to be executed as envisaged in section 117A of the Act
implying thereby that any issue of debentures should necessarily
be secured. Security creation is a must for a public or rights
issue o f debentures and this has been done for protection ofinterest of debenture holders.
10. Manner of creation of Charge:
A charge for securing any issue of debentures is considered as a
charge within the meaning of section 125 of the Act. It
envisaged various types of charges. The nature of charge created
differs from company to company and every company has a
choice as what it would like to offer as security to the debenture
holders. However the security offered should be adequate to
meet the financial obligation to the debenture holders.
Registration of charge will make the debenture holders secured
creditors of the company and as such they have priority claim on
the secured property. A charge on immovable property requiresregistration not only under the Act but also under the
Registration Act. This may also include a charge created by way
of conditional sale of any immovable property.
7/31/2019 All About Debentures
13/27
The creation of charge may be by way of fixed charge or a
floating charge or both. A charge becomes fixed with reference
to the specific property on which charge is created and the
company which creates such a charge has to deal with theproperty subject to charge. On the other hand, a floating charge
is a charge over all the assets, properties and the company may
deal with such property in the ordinary course of business in any
manner until the charge attaches.
However, whether a charge is "fixed" or "floating" has to be
determined by the substance of the transaction and not by thedescription used by the parties in the agreement creating the
charge. A floating charge becomes a fixed charge when the
debtor company ceases to carry on its operations or goes into
liquidation.
There are a number of court decisions determining the nature of
charge. A charge which purports to cover future book debts isheld to be a floating charge by the very nature of the charge and
not a fixed security. In another case, the debtor company created
a fixed charge on its"book debts", the court held that the charge
remains a fixed charge as long as the debt remained uncollected
and a floating charge on collection. This is based on the view
that the company continued to have right to collect the debts andappropriate the proceeds. The classification of charge as fixed or
floating becomes important and serious when the company goes
into liquidation when the determination of ranking of debts has
to be done for payment out of the proceeds of the property.
7/31/2019 All About Debentures
14/27
In the case of multiple charges on the same property, there is
need for determination of ranking of the charge. A registered
charge takes priority over the un-registered charge, whether it be
previous or subsequent to the unregistered charge.
11. Can a private company issue debentures & appoint
debenture trustee?
A private company is prohibited from inviting public to
subscribe to its shares or debentures. However, nothing prohibits
the company from issuing debentures on private placement
basis, if the Articles of the company empowers the Board to
borrow by issuing debentures and creation of security. All other
provisions of the Act as applicable to a public company will
apply except that it may not be required to appoint Debenture
Trustee. The company may execute a deed of charge on its
assets and register it with the ROC and this is permissible under
section 117B of the Act. The requirement of having to createDebenture Redemption Reserve (DRR) will have to be followed
as section 117C is a special provision applicable to all
companies. This is however subject to relaxations provided in
respect to certain categories of companies by the DCA vide its
circular No9\2002 dated 18-4-2002.
12. Can a Company create security on future assets or futurereceivables?
Section 125 of the Act envisages various types of charges
including in particular a charge on the uncalled capital of the
7/31/2019 All About Debentures
15/27
Company, a charge on calls made but not paid etc,. Future
receivables form part of sundry debtors which keeps fluctuating
from year to year and in the case of properties it may consist of
existing assets or any accretion thereto from time to time. Whatis important is the intention of the parties in creating the charge
and the extent of operation of such charge.
13. Can an unlisted public company issue debentures?
Issue of debentures means exercise of borrowing powers.
Therefore, it necessarily follows that the total value of
debentures including other borrowings should be well within the
borrowing limit fixed by the shareholders by a resolution under
Section 293(1)(d) of the Act. The Articles should also authorize
the board to offer the assets of the company as security to the
debenture holders. If the security creation falls within the ambit
of section 293(1)(a) of the Act encompassing the whole or
substantially whole of the assets of the undertaking by way ofsale, lease or otherwise in the event of default, then the approval
of the shareholders will also be required for creation of security.
14. Additional compliances in the case of a listed company
SEBI (Disclosure &Investor Protection)Guidelines,2000 (DIP
guidelines) has been replaced by SEBI(Issue & Disclosure
Requirements) Regulations,2009(ICDR) and it seeks to simplify
capital issue requirements for protecting the interests of
investors in securities .The new guidelines have been issued
under section 30 of the SEBI Act which empowers the SEBI to
7/31/2019 All About Debentures
16/27
make regulations for carrying out the purposes of the Act and in
particular section 11A of the SEBI Act. This provision
empowers SEBI to regulate or prohibit issue of prospectus, offer
document or advertisement soliciting money for issue ofsecurities..
A listed company is required to follow SEBI 2009 guidelines as
applicable to debt instruments, in addition to the provisions of
the Act. No listed company is permitted to issue convertible
security unless it has complied with the requirements of the
Companies Act."Convertible Security" is defined as a securitywhich is convertible into or exchangeable with equity shares of
the issuer at a later date, with or without the option of the holder
of the security and includes convertible debt instruments and
convertible preference shares(SEBI guidelines).. No debenture is
permitted in the case of a listed company for acquisition of
shares or providing loan to a company belonging to the samegroup. This stipulation does not apply to the issue of debt
instrument having a conversion period of less than 18 months.
The aforesaid Regulations specifically provide for the following
types of debt instruments;
a. Rollover of non-convertible portion of partly convertible
debt instruments the value of which exceeds Rs 50 lakhs. Theroll-over may be done without changing the rate of interest if
75% of the holders of security approve the roll-over through the
postal ballot. The issuer should redeem the debentures, if any
holder of such security does not consent for the roll-over;
7/31/2019 All About Debentures
17/27
b. Conversion of optionally convertible debt instrument into
equity capital with the positive consent of holders of such
security. Where the value of security exceeds exceeds Rs 50
lakhs and the issuer has not determined the rate of conversion,the holder of such security should be given an option of not
converting such security. Where an upper limit of price has been
determined by the issuer and disclosed to the investors, the
option aforesaid need not be given.
Chapter VIII of the above guidelines deals with private
placement of securities with Qualified InstitutionalPlacement(QIP's).The eligible securities include, inter alia, non-
convertible debt instruments along with warrants and
convertible securities other than warrants.
Another regulation relates to credit rating of the debt instrument.
No company is permitted to make a public issue or rights issue
of debt instruments, whether convertible or not, unless creditrating of not less than investment grade is obtained from not less
than two registered credit rating agencies and disclosed in the
offer document.
15. Stamping Requirements:
In the matter of issue of debentures, Mortgage Deed ( Article
40) and Debenture ( Article 27) has been dealt with in the Indian
Stamp Act. While the former document sets out the terms and
conditions subject to which debentures have been issued
security, the latter document provides for transfer of debentures
7/31/2019 All About Debentures
18/27
as a marketable security. There are various forms for creation of
security by way of mortgage. It may be with possession or
without possession of Property with reference to which
mortgage has been created or proposed to be created. One of thesimplest ways of creating mortgage is by deposit of title deeds in
respect of secured asset and this has been dealt with in Article 6
o f the Indian Stamp Act. Where the debt is repayable on
demand or more than three months from the date of the
instrument evidencing the agreement, the stamp duty payable is
the same as on the bill of exchange dealt in Article 13(b) of thesaid Act. Accordingly, upto rupees one thousand, it is five
rupees and for every additional one thousand or part thereof, the
duty payable is rupees five. Where it is payable more than one
year after date, the amount of duty payable will have to be
worked on the total value of debentures.
Article 27 deals with stamp duty payable on the transfer ofdebentures as a marketable security by way of endorsement or
by separate instrument of transfer. Rates of stamp duty are given
in the Article. However, in the matter of issue of debenture
certificate, there is an exemption. This exemption is applicable if
the debenture certificate is issued by an incorporated company
in terms of registered mortgage deed, duly stamped in respect of
full amount of debentures and the debenture certificate is issued
pursuant to the said mortgage deed. The proviso to Section 3 of
the Indian Stamp Act which deals with liability of instrument
provides that no duty shall be chargeable in respect of any
7/31/2019 All About Debentures
19/27
instrument executed by or on behalf or in favor of the Developer
or Unit or in connection with the carrying out of purposes of the
Special Economic Zone.
Section 8 of the Indian Stamp Act provides for a duty of one
percent of the total value of debentures, Bonds or other
securities issued by a local Authority for raising loan under the
provisions of Local Authorities Loans Act, 1879 or any other
law for the time being in force and such bonds, debentures or
other securities need not be stamped and they are not chargeable
with any further duty on renewal, consolidation, sub-division orotherwise. There is also duty exemption in the case of issue of
securities to the depositories under the Depositors Act including
transfer of such securities.
In the Karnataka Stamp Act, 1957 item 6 of the schedule deals
with agreement relating to deposit of title deeds, pawn or pledge,
that is to say, any instrument evidencing where such deposit hasbeen made by way of security for repayment of money advanced
or to be advanced by way of loan or existing or future debt, the
stamp duty payable is rupees 50 for an amount exceeding rupees
10,000 (if drawn singly) or Rupees 25 (if drawn in set of two
,for each part o f the set) and for additional 10,000 or part
thereof in excess of Rs10,000,it is Rs 25 (if drawn singly) orRs12-50 (if drawn in more than one set).This applies where the
debt is repayable on demand or more than three months from the
date of instrument evidencing the agreement.
7/31/2019 All About Debentures
20/27
The Stamp duties are a tax on transactions. While the rates of
duties on instruments of commercial nature are prescribed by the
Union Govt for the sake of uniformity, the rates of duties on
other instruments are prescribed by the state legislature inrespect of States having their own stamp acts.
Payment of stamp duty is incidental to acquisition or transfer of
property. Sometimes companies get the Instruments stamped in
the State where the stamp duty is comparatively low to save on
cost, though the property may situate in another state. This may
not work out in a beneficial manner. The Indian Stamp Act bysection 3 which deals with instruments chargeable to duty, inter
alia, provides that (a) every instrument mentioned in the
schedule which, not having been previously executed by any
person, is executed in India on or after first day of July 1899
and(b) every instrument mentioned in the schedule which, not
having been previously executed by any person in India, isexecuted out of India on or after that day, relates to any property
situate or to any matter or thing done or to be done in India and
is received in india are liable to stamp duty. A similar provision
is there in the Karnataka Stamp Act.
16. Debenture Certificate:
The debenture certificate stands on a different footing. Beforeissue of certificate, the company will have to create a charge on
the assets of the company by filing the required forms with the
ROC. The certificate of charge will have to be reproduced on the
back of the certificate as also major terms and conditions subject
7/31/2019 All About Debentures
21/27
to which debentures have been issued. Section 113 of the Act
provides for issue of debenture certificate within three months
from the date of allotment of debentures. However, the
Company Law Board (this power is being shifted to CentralGovt) may extend the period to a further period not exceeding
nine months if it is satisfied that the company is not in a position
to deliver the certificate within the aforesaid period of three
months. Delay in creation of security may be one of the reasons
for seeking extension of time.
17. Debenture Redemption Reserve (DRR):
Section 117C of the Act requires that every company issuing
debentures should create DRR for the purpose of redemption of
debentures to which adequate amounts should be credited from
the profits of the company until debentures are redeemed. This
is a mandatory provision. SEBI regulations also require
companies issuing debentures to provide for DRR as requiredunder the Act. Even where debentures are compulsorily
convertible into the equity shares of the debenture issuing
company, as in the case FEMA, creation of DRR is unavoidable
till the date of conversion. However, after conversion of
debentures, the amount in the DRR may be transferred to
general reserve or in such other manner as the Board thinks fitand proper. The amount credited to DRR cannot be utilized
except for the redemption of debentures. DCA Circular NO 9
\2002 dated 18-4-2002 provides some relief as under in the
matter of DRR in the case of banking Institutions, All India
7/31/2019 All About Debentures
22/27
Financial Institutions, NBFC's and others keeping in view the
genuine problems likely to be caused to these institutions:
a) No DRR is required for debentures issued by All India
Financial institutions(AIFI's) regulated by RBI and banking
companies for both public as well as privately placed
debentures.. For other FI's within the meaning of section 4A,
DRR will be as applicable to NBFC's registered with RBI;
b) For NBFC's registered with RBI under section 45-1A of the
RBI(Amendment) Act,1997 the adequacy of DRR will be 50% o
f the value of debentures issued through public issue and no
DRR is required in the case of privately placed debentures;
c) For manufacturing and infrastructure companies, the
adequacy of DRR will be 50% of the value of debentures issued
through public issue and 25% for privately placed debentures;
d) Section 117C will apply to debentures issued and pending tobe redeemed and such DRR is required to be created for
debentures issued prior to 13-12-2000 and pending redemption
subject to clarification issued herein;
e) Section 117C will apply to non-convertible portion of
debentures issued whether they are fully or partly convertible.
By another circular issued by DCA vide circular NO 4\2003
dated 16-1-2003 the requirement of DRR has been modified in
the case of Housing Finance Companies. .In the case of these
companies registered with National Housing Bank under
7/31/2019 All About Debentures
23/27
Housing Finance Companies (NHB) Directions, 2001, the
adequacy of DRR will be 50% of the value of debentures
through public issues and no DRR is required in the case of
privately placed debentures.
It is also clarified by the DCA that since DRR will have to be
carved out of profits of the company, there is no obligation to
create DRR if there is no profit in a particular year. DRR is
insurance and it enables the issuer of security to redeem the
debentures and fulfill its obligation. If, for any reason, the issuer
of security fails to redeem the debentures, the aggrieved partymay approach CLB\Tribunal which will issue a direction to the
company to redeem the debentures forthwith together with
interest. Failure to do so is punishable with imprisonment
extending upto three years and fine of not less than five hundred
rupees for each day of default. (Section 117C of the Act).
18. Unsecured Debentures
Companies may also issue unsecured\subordinated debt
instruments\obligations. However, such instruments have to be
subscribed by qualified institutional investors or others who
have given positive consent for subscribing to such
unsecured\subordinated debt instruments. In the case of
companies issuing debt instruments like debentures havingmaturity of less than 18 months, there is a facility of creating a
charge on the assets of the company, instead of having to create
mortgage and appoint Debenture Trustee for its assets. However,
where no charge is created as aforesaid, the issuer company is
7/31/2019 All About Debentures
24/27
required to ensure compliance with the provisions of companies
(Acceptance of Deposits) Rules as such unsecured
debentures\bonds are treated as "deposits".
Sections 117 to 123 o f the Act, 1956 provide for special
provisions regarding debentures. These provisions are also
applicable to both public companies and private limited
companies. The provisions of the articles of the company should
also be kept in view. The manufacturing and Infrastructure
companies can avail of lower percentage of DRR as the DCA
circular does not make any distinction between listed andunlisted companies in its circulars referred to above .and the
relaxation is also applicable for privately placed debentures by
private companies.
19. Conclusion:
Issue of Debentures, whether redeemable or convertible involves
compliance with the substantive and procedural aspects of law.
Documentation is equally important. The benefit of raising loan
capital lies in the fact that it does not disturb equity structure of
the company and consequently the existing management.
However, the success of a debenture issue, be it private or public
issue depends, to a large extent, on the goodwill and rapport
built up by the company with the investing public. Anotheraspect o f the matter is the protection of interest of debenture
holders. This is sought to be achieved by an independent
Debenture Trustee who is required to be appointed by listed
companies in regard to public issue or further issue of capital as
7/31/2019 All About Debentures
25/27
the number of debenture holders are considerably large Creation
of DRR which is statutory obligation is intended to provide
liquid resource built out of profits of a company for redemption
of debentures.
This article has been published by the Eastern Region Council of
the Institute of Company Secretaries of India and they retain the
copy right of the article
The content of this article is intended to provide a general guide
to the subject matter. Specialist advice should be sought about
your specific circumstances.
Specific Questions relating to this article should be addressed
directly to the author.
Do you have a question for the author?
Other Information about Fox Mandal & Associate, Bangalore (A
part of FoxMandal Little Group)
View summary of all information contributed by Fox
Mandal & Associate, Bangalore (A part of FoxMandal Little
Group)
View Popular Related Articles on Corporate/Company Law
from Asia Pacific
7/31/2019 All About Debentures
26/27
Retention of title (ROT) clauses under the PPSA (Swaab
Attorneys)
The PPSA has significant implications on many businesses,
especially those who supply goods on retention of title terms.
Proposed directors' liability reforms to harmonise laws on
liability for corporate fault (Norton Rose Australia)
Proposed amenments to legislation aim to harmonise derivative
liability for corporate fault across Australia.
New year, new laws that affect you and your business (CBP
Lawyers)
While you were ringing in the new year, governments were
ringing in new laws.
Why can't I sue the Franchisor?Exit Strategies (Wisewoulds)
Issues to consider when entering - an attempting to end - a
franchise agreement.
Omitting work from contract - variation or termination?
(Clayton Utz)
A principal's right to reduce or omit work will not amount to
termination unless the work has been reduced to nil.
Variable Interest Entity Structure in China (King & Wood)
There are two IPO options for Chinese companies, onshore
listing and offshore listing.
7/31/2019 All About Debentures
27/27
When is it time to sell your Franchise? (Wisewoulds)
A franchise is a licensed contractual right which is not
necessarily transferable unless the agreement allows it.
Wording your contract to get the deal over the line (CBP
Lawyers)
Recent contract law cases have considered the enforceability of
the phrase "reasonable endeavours".