All About Debentures

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


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


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


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


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;


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


7/27

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


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?


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


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


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


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.


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.


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


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


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;


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


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


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.


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


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


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


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


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


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


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.


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".

Documents

All About Debentures