Check out the Debenture Meaning, Types, Issue of Debentures along with Conditions for Issue of Debentures as per Companies Act 2013. A debenture is an instrument of debt executed by the company acknowledging its obligation to repay the sum at a specified rate and also carrying an interest. It is one of the methods of raising the loan capital of the company. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company’s capital structure, it does not become share capital.
As per Section 2(30) of the Companies Act 2013 “debenture” includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not. The debentures in a company shall be movable property transferable in the manner provided by the articles of the company according to section 44.
Types of debentures
On the basis of charge: The section 2(30) of the Companies Act 2013 clarifies that the debentures can be secured or unsecured.
Where debentures are secured by a mortgage or a charge on the property of the company, they are called secured debentures. Debentures that are secured by a mortgage of the whole or part of the assets of the company are called mortgage debentures or secured debentures.
The mortgage may be one duly registered in the formal way or one which is secured by the deposit of title deeds in case of urgency. If the issuer defaults in the repayment of principal or payment of interest, his assets can be sold to repay the liability to the investors.
Where they are not secured by any mortgage or charge on any property of the company they are said to be naked or unsecured debentures. These Debentures do not carry any charge on the assets of the company.
The holders of such debentures do not therefore have the right to attach particular property by way of security as to repayment of principal or interest. If the issuer defaults in the repayment of principal or payment of interest, the investor has to be along with the unsecured creditors of the company.
On the basis of convertibility: the section 71(1) of the Companies Act 2013 a company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption. Thus on the basis of convertibility, debentures can be convertible and non convertible debentures. Convertible debentures can be fully convertible or partly convertible.
Where the debentures are convertible, partly or wholly, into the shares of a company after a specified time, either as a result of exercise of option or in terms of the issue, they are called convertible debentures. Convertible debentures can be of following two types.
Fully Convertible Debentures (FCDs)
These are convertible into equity shares of the company with or without premium as per the terms of the issue, on the expiry of specified period or periods. The tenure of the convertible securities of the issuer shall not exceed 18 months from the date of their allotment. Interest will be payable on these debentures upto the date of conversion as per terms of the issue.
Partly Convertible Debentures (PCDs)
These may consist of two kinds namely – convertible and non-convertible. The convertible portion is to be converted into equity shares at the expiry of specified period. However, the non convertible portion is redeemed at the expiry of the stipulated period. If the conversion takes place at or after 18 months, the conversion is optional at the discretion of the debenture holder
Issue of Debentures
Section 71 of the Companies Act 2013 specifies that any company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption.
The debentures can be issued in the same manner as shares in a company. But unlike shares, debentures can be issued at a discount or at a premium. The Companies Act, 2013 places no restriction in this regard.
Debentures can be issued by any type of company- one person company, small company, private company public company or listed company.
Debentures cannot have voting rights.
A public company has to appoint debenture trustee before the issue of debentures.
Any company can issue secured or unsecured debentures.
For secured debentures conditions for issue of secured debentures under the Companies Act 2013, have to be followed. Debenture trustee has to be appointed and the trust deed in Form No. SH-12 has to be executed.
Any company can issue debentures which are convertible or non convertible.
For convertible debentures, a special resolution should be passed at a general meeting.
A company shall pay interest and redeem the debentures in accordance with the terms and conditions of their issue. Interest payable on them is a debt and can be paid out of capital. There is no ceiling, minimum or maximum, for the rate of interest payable on debentures.
Where debentures are issued by a company, 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.
Where a company fails to redeem the debentures on the date of their maturity or fails to pay interest on the debentures when it is due, the Tribunal 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. (Not notified)
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 less than two lakh rupees but which may extend to five lakh rupees, or with both. (Not notified)
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.
For issue and listing of non-convertible debt securities, Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008 has to be followed.
For issue and listing of convertible debt securities, provisions mentioned in Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 has to be followed.
Conditions for Issue of Secured Debentures
Section 71(3) states that a company may issue secured debentures subject to terms and conditions as prescribed. According to Rule 18(1) of the Companies (Share Capital and Debentures) Rules, 2014, the company shall not issue secured debentures, unless it complies with the following conditions, namely:-
An issue of secured debentures may be made, provided the date of its redemption shall not exceed ten years from the date of issue. However, a company engaged in the setting up of infrastructure projects may issue secured debentures for a period exceeding ten years but not exceeding thirty years;
such an issue of debentures shall be secured by the creation of a charge, on the properties or assets of the company, having a value which is sufficient for the due repayment of the amount of debentures and interest thereon;
the company shall appoint a debenture trustee before the issue of prospectus or letter of offer for subscription of its debentures and not later than sixty days after the allotment of the debentures, execute a debenture trust deed to protect the interest of the debenture holders ; and
the security for the debentures by way of a charge or mortgage shall be created in favour of the debenture trustee on-
- any specific movable property of the company (not being in the nature of pledge); or
- ny specific immovable property wherever situate, or any interest therein.
Debenture Redemption Reserve
Section 71(4) states that where debentures are issued by any 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. The company shall create a Debenture Redemption Reserve for the purpose of redemption of debentures, in accordance with the conditions given below-
- the Debenture Redemption Reserve shall be created out of the profits of the company available for payment of dividend;
- the company shall create Debenture Redemption Reserve (DRR) in accordance with following conditions:-
- No DRR is required for debentures issued by All India Financial Institutions (AIFIs) regulated by Reserve Bank of India and Banking Companies for both public as well as privately placed debentures. For other Financial Institutions (FIs) within the meaning of clause (72) of section 2 of the Companies Act, 2013, DRR will be as applicable to NBFCs registered with RBI.
- For NBFCs registered with the RBI under Section 45-IA of the RBI (Amendment) Act, 1997, ‘the adequacy’ of DRR will be 25% of the value of debentures issued through public issue as per present SEBI (Issue and Listing of Debt Securities) Regulations, 2008, and no DRR is required in the case of privately placed debentures.
- For other companies including manufacturing and infrastructure companies, the adequacy of DRR will be 25% of the value of debentures issued through public issue as per present SEBI (Issue and Listing of Debt Securities), Regulations 2008 and also 25% DRR is required in the case of privately placed debentures by listed companies. For unlisted companies issuing debentures on private placement basis, the DRR will be 25% of the value of debentures.
- every company required to create Debenture Redemption Reserve shall on or before the 30th day of April in each year, invest or deposit, as the case may be, a sum which shall not be less than fifteen percent, of the amount of its debentures maturing during the year ending on the 31st day of March of the next year, in any one or more of the following methods, namely:-
- in deposits with any scheduled bank, free from any charge or lien;
- in unencumbered securities of the Central Government or of any State Government;
- in unencumbered securities mentioned in sub-clauses (a) to (d) and (ee) of section 20 of the Indian Trusts Act, 1882;
- in unencumbered bonds issued by any other company which is notified under sub-clause (f) of section 20 of the Indian Trusts Act, 1882;
- the amount invested or deposited as above shall not be used for any purpose other than for redemption of debentures maturing during the year referred above: Provided that the amount remaining invested or deposited, as the case may be, shall not at any time fall below fifteen per cent of the amount of the debentures maturing during the year ending on the 31st day of March of that year;
- in case of partly convertible debentures, Debenture Redemption Reserve shall be created in respect of non-convertible portion of debenture issue in accordance with this sub-rule
- the amount credited to the Debenture Redemption Reserve shall not be utilised by the company except for the purpose of redemption of debentures.