How to Issue Debentures and Bonds

8/14/2019 How to Issue Debentures and Bonds

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5 DECEMBER 09 www.afterschool.tk 1

How to issue debentures and bonds ?

by :

DR. T.K. JAIN

AFTERSCHOOL

centre for social entrepreneurship

sivakamu veterinary hospital road

bikaner 334001 rajasthan, indiaFOR PGPSE PARTICIPANTS

mobile : 91+9414430763


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Why debenture ?

They are fixed interest bearing instruments,and therefore they reduce overall cost of

capital of the company. Suppose a companyhas cost of equity of 30%, it issues debenture,

which costs 15% , the company is able toreduce the cost of overall capital and thus its

market value will increase. But debentures /loans should be upto certain limits, otherwise,the cost of equity will also go up and there willbe questions about viability of the company.


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What is a debenture ?

Sec. 2 (12) : it includes debenture stock, bondsor other securities of a company whether

constituting a charge on the company's assets

or not.


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What is yankee bond?

A bond issued in the US market by the foreign

banks and companies. As per Securities Act(USA)

1933 : these bonds must be registered with

SEC before they can be sold. They are issuedin tranches and each offering can be as large as

100 Crore $.


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Zero coupon bond ?

A debt security that doesnt pay interest, but itis issued at deep discount but it is redeemed atits face value. It is also called Accrual or Deep

discount bond.


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Types of debentures ?

Redeemable or irredeemable (irrideemabledebentures are not allowed in India).

Convertible (into equity) or non-convertible

secured or non-securedregistered or bearer


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What is debenture trust deed?

(sec. 117A)

As per SEBI (debenture trustees) regulations

1993 and SEBI Guidelines 2000, a companywhich issues debenture will have to appoint

trustees of debentures. These trustees will sign

an agreement when debentures are issued.These trustees will safeguard the interests ofdebenture holders.


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Duties of debenture trustees?

(a) to ensure that the assets of the company issuing debentures and each ofthe guarantors are sufficient to discharge the principal amount at all times;

(b) to satisfy himself that the prospectus or the letter of offer does not

contain any matter which is inconsistent with the terms of the debentures orwith the trust deed;

(c) to ensure that the company does not commit any breach of covenantsand 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 debentures;(e) to take steps to call a meeting of holders of debentures as and when such

meeting is required to be held.


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Contents of debenture trust deed?

Rights of debenture holders

rights and responsibilities of company

matters regarding terms of appointment oftrustees

rights of trustees

other details.


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Debenture redemption reserve

(sec. 117C)

It is compulsory for company to createdebenture redemption reserve.


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Who can be debenture trustee?

A scheduled bank

an insurance company

a public financial institution

a body corporate


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Who cant be debenture trustee?

A shareholder

a guarantor of the company


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Time limit for creating debenture

trust deed?

3 months of issue of debenture


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How to redeem debenture?

Lump sum payment method

drawing of lots method

purchase in open market

convert to equity

redemption out of capital

out of profit


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What is a charge ?

It is a security provided to secure loan


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Types of charge ?

Fixed charge when underlying assets remainsame. Example : building, land etc.

floating charge where underlying assets keep

chaning example : stock, debtors


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How to register a charge?

As per sec. 125, a company has to register acharge with ROC (registrar of companies) in

30 days of creation of charge.


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When will a floating chargecrystalise (convert into fixed

charge )?

1. winding up / liquidation

2. when a company ceases to carry on business

3. when the debenture holders take some stepagainst company for this

4. when there is some event specifying such asper agreement


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Register of charge ?

As per sec. 143, every company will have tokeep a register of charge at its registered office,which can be inspected by any member /

creditor without any fees. (sec. 144) and by

others on payment of fees of Rs. 10 duringbusiness hours


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What type of charges have to be

registered ?Charge for debenture

floating charge

charge on uncalled up share capital

charge on calls made but not paid

charge on ship , movable property (other than a pledge )

charge on immovable propertya charge on book debt

a charge on goodwill, patent, licence etc. (sec. 125(4)


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What will happen if you dont

register charge?

Charge is valid against company, but voidagainst company

creditors can still receive the payment againstthem.

Security becomes void but it doesnt affectobligations of the company.


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Modification of charge ? Sec. 135

Once you modify any condition in charge, youhave to register it in 30 days in form 8 with

ROC.


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What is mortgage ?

Sec. 58 of Transfer of property act 1882 :interest in immovable property for securing

payment


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Types of mortgage

Usufructuary mortgageenglish mortgage

simple mortgage

anomalous mortgagemortgage by deposit of title


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Difference between mortgage,

pledge and lien hypothecation ?

Mortgage is about immovable property

hypothecation is about movable property likecar, truck etc.

Pledge is about stock or such things which canchange. Lien is also to secure loan in lien the

property is given to the lender (creditor)


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What is ECB?

When an Indian company borrows from other

countries, it is called ECB (externalcommercial borrowing). The RBI givespolicies regarding ECB. It includes buyer /supplier credit, commercial loans, and other

loans from foreign markets. It also includefloating rate notes, convertible bonds from

foreign banks.


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Ceiling limit on public deposit

that can be taken .. rule 3(2)

Deposits against debentures / shares etc. From

shareholders : 10% of paid up capital +reserves

govt. Company can get upto 35% of paid up

capital + reservesfrom other public for other companies : max.

25% of paid up capital + reserves


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Advertisement (rule 4)

Proper advertisement in specified format mustbe given in english + vernacular newspapersand a copy of this must be given to Registrar

duly signed by director


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Statement in lieu of advertisement

Rule : 4A : when you dont issue advertisement,file this.


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Register of deposit (rule 7)

Maintain proper register of deposits /debentures etc. with details like name,

amount, address, particulars of the depositor


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Declarations about debentures &

Deposits ....

Whenever a company goes for IPO / FPO(follow on public issue 2nd public issue ) , or

any other issue, it will have to submit a

declaration that it has not defaulted inredemption of debentures / deposits


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How to Issue Debentures and Bonds