Debenture - Under Companies Act, 2013
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Debenture: The word ‘debenture’has been
derived from a Latin word ‘debere’ which means to borrow. Debenture is a
written instrument acknowledging a debt to the Company. It contains a contract
for repayment of principal after a specified period or at intervals or at the
option of the company and for payment of interest at a fixed rate payable
usually either half-yearly or yearly on fixed dates.
Debenture includes debenture stock, bonds
and any other securities of a company whether constituting a charge on the
assets of a company or not as defined in the
Companies 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 the debentures have been issued.
This is an inclusive definition and amounts to borrowing of monies from
the holders of debentures on such terms and conditions subject to which the
debentures have been issued. Basically it is a document or certificate signed
by the authorized officers of a company acknowledging money lent and
guaranteeing repayment with interest and creating security on the assets of the
company for due performance of its obligation.
A debenture means a document, which creates or acknowledges a debt.
[Levy vAbercorries State Co. (1887) 37 Ch D 260]
§ Section
2(30): Definition of Deposit: “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.
§ Section 44: Nature of Share and
Debenture.
§ Section 71: Provision relating to
Debentures.
§ Section 117(3) (a)A copy of every resolution
or any agreement, in respect of the matters specified in sub-section [1](3) of section 17 together with the explanatory statement under section
102, if any, annexed to the notice calling the general meeting in which the
resolution is proposed, shall be filed with the Registrar within thirty days of
the passing of resolution.
§ Section 179 (3) (c,d): (c) to issue securities,
including debentures, whether in or outside India;
*(d) to borrow monies;
§ Section 180(1) (c): The Board of Directors of a
company shall exercise the powers “borrow money”, where the money to be
borrowed, together with the money already borrowed by the company will exceed
aggregate of its paid-up share capital and free reserves, only with the consent
of the company by a special resolution, namely.
§ Section 56(4) (d):within a period of six
months from the date of allotment in the case of any allotmentof debenture.
§ Section 42: Offer or invitation for
subscription of securities onPrivate Placement.
v GOVERNING RULES:
§ Rule 18of the Companies (Share Capital and
Debentures) Rules, 2014: Debentures.
§ Rule 24 The Companies (Management and
Administration) Rules, 2014: Resolutions and agreements to be filed.
§ Rule 1(c) of The Companies (Acceptance of
Deposits) Rules, 2014: “Deposit" does not include
“Any
amount raised by the issue of debentures secured by a first charge or a charge
ranking paripassu with the first charge on any assets referred 73 Proviso to in
Schedule III of the Act excluding intangible assets of the company or
debentures compulsorily convertible into shares of the company within five
years.”
§ Rule 14 of the Companies (Prospectus and
Allotment of Securities) Rules, 2014: Process of Issue and
allotment of Securities (Debentures).
v FORMS INVOLVED:
§ MGT– 14: Filing of Special
Resolutions to the Registrar of Companies.
§ PAS-4: Letter of offerfor
Private Placement of Securities
§ PAS-5: Record of a private
placement offer to be kept by the company
§ GNL: 2 Form for submission
of PAS-4 & PAS-5 with Registrar of Companies
§ SH-12: Debenture Trust Deed
§ PAS-3: Return of allotment
§ CHG-9: forcreation of charge
on assets of the Company
§
DRAFTINGINVOLVED:
§ Debenture Subscription
Agreement.
§ Letter of offer of Private
Placement of Shares
§ Debenture Trustee Agreement,
if required.
§ Mortgage Agreement for
creation of charge on assets of the company, if required.
PURPOSE OF FILING OF FORMS:
§ MGT-14:This form is required to be filed within 30 days of passing
of Special resolution for All The
Companies including Private Limited Company {Section 117(3)(a)}.
§ MGT-14:This form is required to be filed within 30 days of passing
of resolution to issue securities, including debentures, whether in or outside
India {Section 179(3)(c)}.
§ GNL-2:PAS-4 & PAS-5 are physical form will file with ROC in
e-form GNL-2.
RESOLUTION REQUIREMENT:
Special Resolution:A Special
resolution is required to be passed at a General Meeting of the Company for
following purposes:
§
To issue Debentures.[Section 71(1)first
proviso].
§
To increase borrowing power of the
Company, if Required.
First Board
Resolution:Board resolution is required to be Pass
for following purposes:
§ Pass resolution to increase borrowing power of the Company,
subject to approval of Shareholders.
§ Pass resolution to issue Debentures, subject to approval of
Shareholders.
§ Approval of draft offer letter (PAS-4) for issue of
Debentures.
§ Take note of valuation report
§ Approval of draft Debenture Trustee Agreement and
appointment of a Debenture Trustee.
§ Issue the Notice of General Meeting along with explanatory
statement. (According to SS-2).
§ Authorize a Company Secretary or director of company to
issue notice of General Meeting.
§ Open Separate Bank Account: for receipt of money on issue of
debentures.
Second
Board Resolution:Board resolution is required to be Pass
for following purposes:
§
To allot Debentures.
§
To authorize directors to issue and sign the debenture certificates.
§
To authorize director of the company to file e-form PAS-3 for allotment
of Security.
§
To authorize director of the company to file e-form CHG-9 for Creation
of Charge.
CIRCULARS/ NOTIFICATIONS/ AMENDMENT RULES:
§
The Companies (Share Capital and Debentures) first Amendment Rules,
2014 dated 18th June, .2014
§
The Companies (Share Capital and Debentures) Second Amendment Rules,
2015 dated 18th March, 2015.
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Section
under
CA
2013
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Section
under
CA
1956
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Matters dealt with
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2(30)
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2(12)
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Meaning of Debentures
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56(4)(d)
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108,
108A to 108L, 109, 110, 113
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Issuance of debenture certificate within 6 months from the
date of allotment
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71
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117,
117A to 117C, 118, 119 122
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Debentures
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77
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125,
128, 129, 132, 133, 145
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Duty to Register charges on secured debentures
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136
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219
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Right
of Debenture holders to obtain copy of the Annual Accounts
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Security:
(a)Secured Debentures: Secured debentures refer to those debentureswhere a charge is created
on the assets of the company for the purposeof payment in case of default. A charge
ranking PariPassu with the first charge on any assets referred to in Schedule III of the Act excluding intangible assets of the
company.
The secured debentureholders have greater
protection. Holders of secured debentures remainconvinced about the payment of
interest and payment of principal in the event of redemption.
(b) Unsecured Debentures:These debentures are also known as naked debentures. These
debenturesare not secured by way of charge on the company's assets. Interest
rate payable on unsecureddebentures is generally higher than that which is
payable on secured debentures.
Tenure
(a) Redeemable
Debentures: Redeemable debentures are those which are
payable on the expiry of the specific period (Maximum period 10 years from the
date of issue) either in lump sum or in Installments during the life time of
the company. Debentures can be redeemed either at par or at premium.
(b)
Irredeemable Debentures: Irredeemable debentures are also known as Perpetual Debentures
because the company does not give any undertaking for the repayment of money
borrowed by issuing such debentures. These debentures are repayable on the
winding-up of acompany or on the expiry of a long period.
Ø Debentures may be for fixed terms or
payable on demand:
·
Debentures may be for fixed term of years or
repayable on notice. [Wiley v Stocks (1909) 26 TLR 41]
·
They can legally be framed as payable to bearer
[Edlstein v Schubrelo (1902) 2 KB 144]
Convertible:
These debentures are issued by a company on the
basis of option provided to them for conversion ofdebenture in the equity
shares of the company after a certain period. It may be classified in the
following categories:—
a) Convertible
Debenture:These debentures are converted into equity shares
of thecompany on the expiry of a specified period.
b)
Non- Convertible Debenture:Partly convertible debentures are divided into twoportions, viz., convertible
and non-convertible portion. The convertible portion is converted into equity
shares of the company at the expiry of specified period. The non-convertible
portion is redeemed at the expiry of the specified period in terms of the
issue.
c)
Partly Convertible Debenture:Non-convertible debentures do not have any option toconvert the same
into equity shares and are redeemed at the expiry of specified period(s).
Basis of negotiability
Debentures issued by a company may be negotiable
or non-negotiable. There are following two typesof debentures:—
Bearer Debentures.-These debentures are payable to bearer of the debentures and
transferable bymere delivery. These debentures are also known as unregistered
debentures.
Registered Debentures- These debentures are not transferable by mere delivery of
debenturecertificates and shall be transferred as per the provisions of the
Companies Act, by executingtransfer deeds and the transfer registered by the
company. Registered debentures are notnegotiable instruments. A registered
holder of a debenture means a person whose name appearsboth in the debenture
certificate and in the register of debentureholders. Principal and
interestamount, when due in respect of these debentures are payable to the
registered holders thereof only.
Let’s Discuss Provision of Issue of Debentures:
Ø
Which type of
debentures is allowed to issue by Companies under Companies act, 2013?
i.
Any amount raised by the issue of
debentures SECURED BY
·
a first charge or
·
a charge ranking PariPassu with the
first charge on any assets referred to in Schedule III of the Act excluding
intangible assets of the company OR
ii.
Debentures COMPULSORILY
convertible into shares of the company within five years:
According to the above mentioned statement it’s clear that
Company can issue two types of Debentures:
i.
Debentures secured by
charge on any assets referred to in Schedule III of the Act.
ii.
Debentures COMPULSORILY convertible into shares of the company within five years.
There is an exemption as per Deposit Rules, company issue
debentures on conditions other than mentioned above to Directors, Relative of
Directors, Companies and Foreigners.
Ø
Whetherdebenture is
part of Share Capital?
Debentures are not part of share capital, it is a loan
capital and company is liable to pay interestthereon whether there are profits
or not.
Ø
Debentures with voting
right:
As per 71(2) Company can’t issue debentures carrying voting
rights. Therefore, Debentures holders don’t have any voting rights.
Ø
Provisions regarding Issue
of Secured Debenture?
If Company is issuing secured debentures T & C for
issuance of such debentures are given in Rule 18of the Companies (Share Capital and
Debentures) Rules, 2014.
§ Debentures
are normally secured by a charge on the undertaking of the company and all its
property, present and future.
§ Debentures
can be secured by mortgage of immovable property or hypothecation or pledge of
movable property, they constitute actionable claims.
§ Charge
can’t be creating on the intangible assets of the Company.
§
Whether secured
debentures can be issue as floating charge?
In case
of issue of secured debentures charge can’t be floating charge, Charge will be
only fixed charge. Because act says that, any amount raised by the issue of
debentures secured by a charge ranking PariPassu with the first charge on
any assets referred to in Schedule III of the Act.
Floating
charge will be on stock or receivable of the Company. Stock or receivables are
not the part of Assets under schedule III. Therefore, charge can’t be create as
floating charge in case of issue of secured debentures.
§ Debentures
may be issued and kept with the company's bankers as collateral security in
respect ofloans obtained from banks. [Samuel v Jarrah Timber Corporation (1904)
AC 330].
§ Period of Redemption of Debenture:
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The date of itsredemption shall not exceed 10 (ten)
years from the date of issue.
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The following classes of companies may issue
secureddebentures for a period exceeding 10 (ten) years but not exceeding 30 (thirty)
year
i.
Companies engaged in setting up of infrastructure
projects;
ii.
‘Infrastructure Finance Companies’ as defined in
clause (viia) of sub-direction (1) of direction 2 of Non-Banking Financial
(Non-deposit accepting or holding) Companies Prudential Norms (Reserve Bank)
Directions, 2007;
iii.
Infrastructure Debt Fund Non-Banking Financial
companies’ as defined in clause of (b) direction 3 of Infrastructure Debt Fund
Non-Banking FinancialCompanies (Reserve Bank) Directions, 2011.]
Ø
Debenture Warrant:
A
company may issue the convertible debentures, whether fully convertible or
partly convertible withdetachable warrant. The warrant gives a right to the
holder to get equity shares mentioned in the warrantafter the expiry of a
certain period at a price not exceeding the price fixed in the warrant
Ø
Debenture at Discount:
As per section 54 of the Companies Act, 2013 there
is restriction on the Companies for the issue of shares at a discount. But
there is no prohibition on issue of Debentures on discount.
Ø Interest on Debenture:
§ As
stated in section 71(8) a company shall pay interest and redeem the debentures
in accordance with the terms and conditions of their issue.
§ Interest
rate in respect of debentures is freely determinable by the issuercompany.
§ The interest
may be paid quarterly, half-yearly or on anyother terms of its issue.
§ Zero Rates of Interest Debentures: Company can issue this
type of debenture, Rate of interest in these debentures will be zero.
Ø Debenture Redemption Reserve:
§ As
stated in section 71(4) the company shall create a debenture redemption reserve
account out of the profits of the company available for payment of dividend.
§ The
amount credited to such account shall not be utilised by the company except for
the redemption of debentures.
§ 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.
Rule
18(7) of the Companies (Share Capital and Debentures) Rules, 2014 provides that
the company shall create a Debenture Redemption Reserve for the purpose of
redemption of debentures, in accordance with the conditions given below:
§ It
shall be created out of the profits of the company available forpayment of dividend
§ No need of creation of DRR:No need
of creation of DRR for debenture issued by
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All India Financial Institutions (AIFIs) regulated
by Reserve Bank of India.
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Banking Companies.
-
Financial Institutions(FIs) within the meaning of
clause (72) of section 2 of the Companies Act,2013.
§ Percentage of contribution in DRR:
-
For other companies including manufacturing and
infrastructure companies, the adequacy of DRR will be 25% of the value of
debentures
<in case of issued through public issue as per present SEBI (Issue
and Listing of Debt Securities), Regulations 2008 and
<in the case ofprivately placed debentures by listed companies
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For unlisted companies issuing debentures on
private placement basis, the DRR will be 25% of thevalue of debentures.
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Partly
Convertible Debenture: in case of partly convertible debentures, Debenture
Redemption Reserveshall be created in respect of non-convertible portion of
debenture
§ Method of investment in DRR:Every
company shall invest or deposit, as the case may be
-
Date
of Deposit:on or before the 30th day of April in each year,
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Amount
of Deposit: At least 15% (fifteen percent), of the amount of its debentures
maturing during the year ending on the 31st day of March of the next year,
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In any one or more of the following methods,
namely:-
i.
in deposits with any scheduled bank,
free from any charge or lien
ii.
in unencumbered securities of the
Central Government or of any StateGovernment
iii.
in unencumbered securities mentioned in
sub-clauses (a) to (d) and (ee) of section 20 of the Indian Trusts Act, 1882
iv.
in unencumbered bonds issued by any
other company which isnotified under sub-clause (f) of section 20 of the Indian
Trusts Act, 1882
§ Use of the earning form the above investments: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.
Ø Debenture Trust Deed:-
§ Rule
18(5) of the Companies (Share Capital and Debentures) Rules, 2014 state that - A trust deed in Form No. SH-12
or as near thereto as possible shall be executed by the Company issuing
debentures in favour of the debenture trustees 68.
§ The Trust deed shall be executed within three months of closure of the
issue or offer.
§ Open for Inspection: A trust deed for securing any issue of debentures shall be open for
inspection to any member or debenture holder of the company, in the same
manner, to the same extent and on the payment of the same fees, as if it were
the register of members of the company
§ Copy of Deed: A
copy of the trust deed shall be forwarded to any member or debenture holder of
the company, at his request, within seven days of the making thereof, on
payment of fee.
§ Debenture Trust Deed Contain: The debenture trust deed shall, inter alia, contain the following:
-
Description
of Debenture Issue
-
Details of
Charge Created (in case of Secured Debentures)
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Particulars
of the Appointment of Debenture Trustee(s)
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Events of Default
-
Obligations
of Company
-
Miscellaneous
[2]
Not required to file in case of Private Limited Company.
[3]For NBFCs registered with
the RBI under Section 45-IA of the RBI(Amendment) Act, 1997, [and for Housing
Finance Companies registeredwith the National Housing Bank] ‘the adequacy’ of
DRR will be 25% of thevalue of debentures issued through public issue as per
present SEBI (Issueand Listing of Debt Securities) Regulations, 2008, and no
DRR is requiredin the case of privately placed debentures
Sir,
ReplyDeleteCan Pvt Ltd Company can issue unsecured fully convertible Debentures to general public?
NO
DeleteYES. It can issue CCD.
DeleteCan a loss making Private Company issue unsecured debentures? Please specify the provision regarding DRR in this specific case.
ReplyDeleteGreat share!
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