Debentures

Mr. Atul Abhiman Agalawe(M. Com, B. Ed, D.B.M)

Debenture

• The debenture has come from Latin word ‘debare’ which means to ‘owe’

• It is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest.

Definitions

1. “Debenture includes—debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not.” ____Sec 2 (12) of Companies Act 1956

2. “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. ____Sec 2 (30) of Companies Act 2013

3. “Debenture is a document given by the company as evidence of debt to holder usually arising out of loan and most commonly secured by charge.” ______ Tophon

4. “Debenture is an instrument under seal evidencing debt, the essence of it being admission of indebtness.” _____ Palmar

5. “Debenture is a document which either creates a debt or acknowledges it.” —Justice Whity

Debentures

On the basis of security

Secured

Unsecured

On the basis of Transfer

Registered

Bearer

On the basis of Repayment

Redeemable

Irredeemable

On the basis of Conversion

Convertible

Non-Convertible

On the basis of Priority/Claim

First

Second

Statutory Provisions regarding Issue of Debentures

Applicable Provisions: Section 56, 71, of the Companies Act, 2013 read with Rule 18 and 19 of the Companies (Share Capital and Debentures) Rules, 2014• Any company issues debentures• Power to Issue• Term of Issue and Redemption• Mode of Issue• No Voting Rights• Security• Permission of SEBI• Register of Debentures

Conditions for Valid Issue of Debentures

• Filing of Prospectus to R.O.C• Amount deposited in Schedule Bank• Board of Director• Proper Communication• Listing with Stock Exchange• Allotment Period• Debenture Certificate• Credit Rating

Procedure of Issue of Debentures

Board Resolution

Approval by shareholders Consent of SEBI Listing with

Stock Exchange

Credit Rating Trust Deed Issue of Prospectus

Receiving Applications & Allotment of Debentures

Issue Debenture Certificate

Entries in Register of Debenture

holder

Conversion of Debentures into shares

• The Debentures convert into equity shares after specific time period.

• Debentures convert into equity shares after 18 months and before 36 months of allotment of debentures.

• Fully conversion• Partly conversion

• Provisions1. Prospectus/Letter of

Offer2. Letter of option3. Special Resolution4. Filing of copy of letter of

option to R.O.C5. Rate of Conversion6. Rejection of conversion

offer

Procedure of Conversion

Board Resolution

Letter of Option

Allotment of shares

Changes in Register

Entries in Register of Members

Filing of Return of Allotment

Redemption of Debentures• Redemption of debentures

means payment of the amount of debentures by the company. When debentures are redeemed, liability on account of debentures is discharged.

• Normal Companies: up to 10 years.

• Infrastructure Development Companies: More than 10 years and less than 30 years

• Provisions– To create Debenture

Redemption Reserve Fund

– Default in Repayment– Penalty for Default

Procedure for Redemption of Debentures

Board Meeting Intimation to Debenture holder Refund

Entries in Register of Debenture

holder

Changes in Register of

charges

Intimation to Registrar of Companies

Methods of Redemption of Debentures

• Redemption after Fixed Period• Redemption by Annual Installment• Redemption by Draw Method• Redemption by Own Purchase Method• Redemption by Fresh Issue Method