Introduction To Concept of Debentures
In every corporate organization, enormous or not, engaged in doing business or
involved in manufacturing activity or industry providing services, there is
always requirement of finances and funds. In order to run a business effectively
and successfully, adequate amount of capital is necessary. In some cases it is
capital is arranged through internal resources i.e. by way of issuing equity
share capital or using accumulated profit . Equity funds are raised by taking
money from the shareholders by way of their initial contribution in fixed income
securities such as treasury bills and bonds. The share holders are the owners of
the company. Equity funds most of the times is not adequate and the organization
is resorted to external resources for arranging capital i.e. External Commercial Borrowing(ECB),
Debentures, Bank Loan, Public Fixed Deposits etc. There is a provision of powers to borrow for the company in the memorandum
of association of a company. The loans are raised by the corporate sector by the way
issuance of debentures. As the funds raised by the issue of shares are are not
adequate to meet the financial demand of the company for long run. Hence, the
companies choose to raise long- term funds through debentures. A Debenture is
basically some of the loan amount the company was interested to raise from
the public , that is why it issues debentures. A person who has bought a
debenture and holding it is called a debenture holder. A debenture holder is the
creditor of the company. Under the seal of the company . Debenture is document
issued under the seal of the company. Debenture is an acknowledgment of the
funds received by the company equal to the nominal value of the debenture. It
includes the payment of interest at a fixed rate till the times the principal
sum becomes repayable. There may or may not be a charge put on the sets of the
company as security. The date of redemption along with the rate and mode of
payment of interest are mentioned in it. The last few years has seen the
capital market of India to evolve at a much faster rate, the reasons are launch
of new instruments and the modifications in the old technology. In the present
situation debentures prove to be a great contributor to support the financial
needs of the corporate sector. The issue of debentures is a means significant
for raising capital from the market as contrasted with the other modes like ,
preference shares, bonus as shares, equity shares, rights issues. The provisions
of the Companies Act identifying with plan additionally apply to debentures
where they are issued to the general population. The Companies act does not
provide for a exhaustive definition of debentures but an inclusive definition.
As per the definition of debenturegiven in Section 2(30) of the Companies
Act 2013 "Debenture includes debenture stocks, bonds or any other instruments
a Company evidencing a debt, whether constituting a charge on the assets of the
Company or not". This sections proves that the company has right to issue bonds
or debenture which are instruments as an debt, which can be both secured or
unsecured by the way of creating charge on the way of creating charge on the
assets of the company. A company may issue debentures as a type of long-term
unsecured bond on agreeing to repay it at a predetermined future date. The
company usually pays interest to the debenture holders at the end of every year
till the time of maturity , but if it is not able to pay either the interest or
the principal amount of the loan the creditors of the company has right to ask
company into liquidation to recover their money by the way of selling the assets
of the company.
Characteristics of Debentures
·Debenture is a movable property. It is in the form of a certificate of
indebtedness of the company and issued by the company itself. It generally
creates a charge on the undertaking or undertakings of the company. There is
usually a specific date of redemption.
·The debenture holders are creditors to the company and they donot have
any claim of ownership of the company unlike share holders. The company is only
under debt of the debenture holders.
·As the debenture holders are not the owner of the company so they are
not entitled with the administration and management of the company.
·The debenture holder need not be concerned with the profits or loss of
the company, they have a fixed rate of interest on the principal amount which
they get every year irrespective of the financial condition of the company.
·Debentures usually have a charge on the assets of the company, which
means that if the company on liquidation is not able to repay the amount the
debenture holders can sell of property of the company to recover money.
·There is an undertaking given by the company to repay debenture
holders the principal amount along with the interest at the state time.
·The debenture holders cannot claim the privilege to vote in any
meeting of the company.
·When the company is winding up, the first priority of the company is
to repay to the debenture holders of the company hence , there is no risk
involved of loss of money of the debenture holders.
·There is a series with pari passu clause which is usually a part of
the debentures being issued and it would be equal as security and if the
security is being enforced, the amount shall be discharged relate ably. If there
is deficiency of assets, the division will be proportionately.
Kinds of Debenture
Debentures are generally classified into different categories on the basis of:
(1)Convertibility of the instrument
(2)Security of the instrument
(4)Registration of Instrument
1.on the basis of convertibility, Debentures are classified into following
(A) Non Convertible Debentures– This type of debentures cannot be converted
either into preference shares or equity shares. Non-convertible debentures can
either be unsecured or secured. These type of debentures are usually redeemed
only on the maturity of a predetermined period which may be 10 or 20 years.
These instruments retain the debt character and can not be converted into
(B) Partly Convertible Debentures - Apart of these instruments are converted
into equity shares in future at the notice of issuer. The issuer decides the
ratio for conversion. The ratio is usually decided at the time of subscribing
the debentures. If a debenture converts some of his debentures into share, he a
member as other shareholders for those shares, amending the rights accordingly.
Thus convertible debentures may be called as debentures which can be converted
by he debenture holder after a specific time.
(C) Fully Convertible Debentures -These are those debentures which can be
converted into equity or preference shares after a certain period at
predetermined rate of exchange. If a debenture converts his debentures into
share, he cease to be the creditor of the company and become a member as other
shareholder, amending the rights accordingly. Thus convertible debentures may
be called as debentures which can be converted by he debenture holder after a
specific time. At the time of issue of debenture the rate at which the exchange
takes place is decided . Till the time of conversion only the interest is paid
to the debenture holder and after that the rights exercised would same as
shareholder. In order to issue convertible debentures prior approval of the
shareholders is mandatory. The sanction of central government also required for
issuing convertible debentures.
(D) Optionally Convertible Debentures- It is a t the option of the debenture
holder to convert these debentures into share. The price for such conversion is
decided by the issuer and was consented upon by both parties at the time of
issue of debenture.
2. on the basis of security, Debentures are classified into following
(A) Secured Debentures –The instruments which are secured as there is a charge
on the fixed assets of the company. This is to secure the debenture holder as
and when the issuer makes a defaults in the payment of either the principal or
interest amount, the assets of the issuer can be sold of in order to do away
with the liability to the debenture holders by repayment. In Companies Act,
2013 there is a provision in Section 71(3) which says that a company has right
to issue secured debenture subjected to the conditions of the government of
(B) Unsecured Debentures– These type of debentures are unsecured in the way
that if there is a default in payment of the principal amount or interest amount
the debenture holder will have be along with other unsecured lenders and hence
could not sell any property or anything for repayment hence they are also called
3. on the basis of Redeemability, Debentures are classified into following
(A)Redeemable Debentures -The debentures which are issued with the option of
redemption on demand or after serving notice or at a fixed date or through a
system of periodical drawing. Usually debentures are of redeemable nature and
after redemption they can either be cancelled or can be reissued. The priorities
and rights of the person who is reissued the debentures shall be same as the
debentures were never redeemed.
(B)Perpetual or Irredeemable Debentures –an irredeemable debenture is a type
of debenture in which there is not fixed time for the issuer to repay the
amount. The debenture holder does not have right to demand for the payment of
principal amount until and unless the company does not default in making payment
of the interest regularly. If a company is going into liquidation it has to pay
for all the debenture whether redeemable or irredeemable.
4.on the basis of Registration, Debentures are classified into following
(A) A Registered Debentures- The debentures which are made in the name of a
particular individual who is registered by the company as the debenture holder
on there register of debenture holders and also his name appears on the
debenture certificate. These debentures can be transferred in the similar way as
shares are transferred by due means of proper instrument which includes stamped
duly, executed and satisfying the demands under Section 56 of the Companies Act,
(B) Bearer Debentures- These shares on the other hand are negotiable
instrument are made out to bearer and so are transferrable by only delivery like
share warrants. The person to whom a beared debenture is transferred becomes a
"holder in due course" and he has a right to recover and receive the principal
amount along with interest on it.
Rules And Guidelines on Debentures
SEBI (ICDR) Regulations 2009
Under the SEBI Regulation 2009, "specified securities" means equity shares and
convertible securities. The "convertible securities" is defined as a security
which is exchangeable with or converted in equity shares of the company after
date of maturity with or without the option of the debenture holder and it also
includes convertible preference share or convertible debt instrument. Thus the
conditions to be discussed below are specified for equity shares but are also
applicable to public issue of convertible debt instruments also. The issuer of
such convertible debt instruments shall comply with the following:
·To obtain rating from 1 or more rating agencies.
·Appointment of 1 or more trustee as provided by Section 71(5) of
Companies Act, 2013 and some other rules.
·Creation of Debenture Redemption Reserve as provided by by Section
71(4) of Companies Act, 2013.
·If the company offers to create a security or charge on its assets
with respect to the secured convertible debt instruments, it shall ensure that:
a) Those assets are substantial to discharge the total principal amount at
any point of time
b) Those assets shall be free from any interference.
c) The assets or security should come after subtraction of liabilities
constituting prior charge, in case the convertible debt instruments are secured
by a second or subsequent charge.
d) The redemption of the convertible debt instruments shall be done by the
issuer as per the terms and conditions of the offer document. These regulations
are also for partly convertible debt instruments.
Provisions of Companies Act 2013 and Companies (Share Capital and Debentures)
· As provided in Section 71(2) , no company is entitled to issue
debentures which carry voting rights. Secured debentures shall adhere to the
· Section 71(3) says that subject to certain prescribed terms and
conditions secured debentures can be issued by a company.
·Rule 18(1) prescribes following conditions
(1) The company shall issue secured debentures , provided that the date of
redemption does not exceed 10 years from the date of issue. The exception to
this are companies involved in setting up infrastructure projects can exceed up
to 30 years but not beyond that.
(2) The issue of debenture shall be secured by creation a charge on the assets
and properties of the company, value of which shall be substantial enough for
the due repayment of the principal amount of the debentures along with the
interest on it.
(3) It is mandatory for the company to appoint a debenture trusteeprior to
issue of letter of offer or prospectus for subscription of its debentures. The
company shall within 60 days of allotment of debenture, execute a trust deed in
to prevent injustice and protect the interest of the debenture holders.
(4) In the case where any issue of debenture by a company which is fully
secured by guarantee given by Central government or state government or both
then there is no requirement for creating charge on the assets of the company.
Issue of Debentures
The manner of issuing of debentures is usually similar to that of issuing share,
it is through prospectus inviting applications for debentures, the money is to
be paid in installments on application, allotment and on specific dates.
Debentures can, be issued in three ways.
At par: When the amount collected for it is equal to the nominal value of
debentures ,it is said to have been issued at par. e.g. the issue of debentures
of Rs. 300/- for Rs. 300/-
At Discount: When the amount collected is less than the nominal value, debenture
is said to have been issued at discount. For e.g., issue of debentures of Rs.
300/- for Rs. 270/-. The difference of Rs. 30/- is the discount and is called
discount on issue of Debentures. This discount on issue of debentures is a
At Premium: A debentures is said to be issued at a premium , when the price
charged is more than its nominal value. e.g., issue of debentures of Rs. 300
each for Rs. 320, the excess amount over the nominal value i.e., Rs. 20 is the
premium on issue of debentures. Premium received on issue of debentures is a
capital gain. This Premium on issue of debentures could not be used for
distribution of dividend. Premium on debentures reflected under Surplus and the
head Reserves on the liability side of the Balance Sheet.
Time limit for issue of debenture certificate
The allotee is entitles to be issued with the debenture certificate within a
period of 6 months from the date of allotment. It is provided for in Section
56(4) of the Companies Act, 2013. The
Section 56(6) of the Companies Act, 2013 provides that if a company fails to
issue the debenture certificate within the time limit, it shall be made liable
to pay a fine minimum of 25,000 rupees which may extend to 5,00,000 rupees. The
officer who who is in default shall by punished with a fine which is 10,000
rupees minimum and extending to 1,00,000 rupees.
Further in Section 71 of the Companies Act, 2013 there are provisions with
respect to issue of debenture which is as follows –
(a) With an approval by a special resolution passed at a general meeting, the
company can issue debentures which can be converted into shares either partly or
wholly at the time of redemption of debentures.
(b) There shall not be any debenture with any voting rights.
(c) There are certain terms and conditions prescribed subject to which the
company can issue secured debentures As per rule 18 of Companies (Share
conditions and Debentures) Rules, 2014 subject to some conditions only
secured debentures of redeemable nature can be issued, the conditions are as
·The redemptions date for secured debenture shall not exceed 10 years
from the time of issue of debentures. However , there are a few classes of
company which can issue secured debentures exceeding the period of 10 years but
not more than 30 years
(i) The companied which are involved in setting of infrastructural projects
(ii) Infrastructure Finance Companies
(iii) Infrastructure Debt Fund Non- Banking Financial Companies
·The issue of debenture shall be secured by creation a charge on the
assets and properties of the company, value of which shall be substantial enough
for the due repayment of the principal amount of the debentures along with the
interest on it.
·It is mandatory for the company to appoint a debenture
trusteeprior to issue of letter of offer or prospectus for subscription of
its debentures. The company shall within 60 days of allotment of debenture,
execute a trust deed in to prevent injustice and protect the interest of the
·In the favor of debenture trustee a mortgage or charge shall be
created as the security for debentures, which can be-
(i) Any specific movable property of the company which is not in
the nature of pledge or
(ii) Any specific immovable property situated anywhere or any
(d) For the purpose of securing the form of debentures trust deed, issue of
debentures, the procedure for the debenture holder to probe into the trust deed
and to get copies thereof, quantum of debenture redemption reserve needed to be
created. The rules framed includes that the trust deed has to be executed by
the company issuing debentures within 3 months of the closure of the offer or
Debenture Trust Deed
At the of issue of debentures for public subscription, it involves a large
number of debenture- holder , it is not practicable to create a individual
charges in favor of thousands of debenture – holders. Hence , the most
convenient and common for securing all the debenture holders is to execute a
trust deed conveying the property belonging to the company to the trustees and
announcing a trust in favor of debenture-holders. A trust deed usually gives the
trustees a free charge on the property of the company except for the freeholds
and leaseholds on which it has fixed charge. A trust deed is the documents
containing the conditions put on the debentures and the entitlements of the
debenture – holders and the company. Following powers are given to the trustees
through the trust deed:-
(i) To get a mortgage over that property of the company’s
property in which case the title deeds are transferred to them and the company
can not further create charge ranking in the priority of debentures.
(ii) To renew leases and to lease or sell the property.
(iii) To trade of the mortgaged property for any other suitable
(iv) To adjust claims.
(v) To defend actions and also to commence them.
(vi) To amend the current contracts applicable on any part of the
(vii) To appoint a receiver on the security becoming enforceable.
(a) The benefit of a trust deed is that it is the duty of the trustees to
look after the well being and interest of the debenture holders, also the
trustees are bound it act in an honest manner with due diligence and care. In
fact, any provision or clause in the trust deed which indemnifies trustees
against liability or exempting them from their duty as trustees is void.
(b) The trustees have a legal mortgage over property of the company so any
person who lends money money subsequently can not be given priority over the
(c) At the time of default made by the company, the trustees have authority
of enforcement of security on the part of the debenture – holders.
(d) It is the duty of the trustees to insure that the property is properly
maintained and insured. It is not practicable for a large body of debenture
holders to do that.
(e) No company is entitled to make an invitation or offer or issue a prospectus
to the public or its members more than 500 for subscription of its
debenture, unless the company has prior to such offer or issue, the company has
appointed one or more debenture trustees.
(f) The debenture trustee has a duty to address the grievances of the
debenture holder and to take steps to protect their interests complying to the
Rights/Remedies of Debenture Holder
·According to the rule 18it is the duty of the debenture trustee to
communicate debenture holders defaults, if occurs, with respect to redemption of
debentures or payment of interest and any either action taken by the trustee
himself. Besides , the debenture trustee appoints a nominee director on the
board of the company if there are 2 consecutive defaults by the company in
payment of interest to the debenture holder or failure in redemption of
·As per the section 71(8) of the Companies Act, 2013 the debenture holder is
entitled to interest and redemption of debentures in accordance with
the conditions of their issue.
·In section 71(10) of the Companies Act, 2013 there is a provision if the
company makes a default either in payment of interest due or in redemption of
debentures on date of maturity of debentures, the Tribunal may , on application
wither of debenture trustee or of any or all of the debentures and, after
hearing the parties involved , direct, through order , the company to redeem the
debenture with payment of principal amount as well as the interest overdue.
·Further if the companies make a default in complying with the order of
the tribunal, the section 71(11) of the Companies Act, 2013 provides that the
tribunal shall punish the officers in default with an imprisonment which may
extend to 3 years or with fine shall minimum be of 2,00,000 rupees and can
extend to 5,00,000 rupees or both. This section is applicable to both secured
and unsecured debenture holder. The debenture holder can give an application to
the Tribunal to pass an order of payment for the company which has defaulted.
The Tribunal before passing an order takes into account the circumstances under
which the company defaulted in making payment.
·Section 164(2)(b) imposes for disqualification of the directors of the company
who has defaulted in redemption of debentures on the date of maturity
and if such default has continued for 1 year or more. Such a person will not be
able to be director of that company ever again or of any other company for 5
years from the date on which the company has failed to redeem the debentures.
·Section 186(8) of the Companies Act, 2013 provides that any company who
has failed to repay any deposits or payment of interest shall not give any loan
or guarantee or make any acquisition or provide any security till such default
Redemption of Debenture
Redemption of debentures stands for repayment of the total amount of the
debentures by the company in accordance with the terms and conditions of the
issue. once a debenture is redeemed by the company, it is discharged or absolved
of the liability on account of those debentures. There are four ways by which
the debentures can be redeemed.
1) Payment in lump sum– At the end of stipulated time period the company
redeems debenture by the payment of lump sum amount as per the terms of issue.
2) Payment in installments –The payment for redemption of debentures in
this case is made in installments on specific dates during the tenure of the
debenture. The total liability of the company is divided into number of years.
3) Purchase in the open market –Redemption of debentures by purchase in
the open market is when a company purchases its own debenture to for the purpose
of cancellation of such debentures.
4) By conversion into shares or new debentures-In this type the companies
redeems its debenture by converting them either into share or creating a new
class of debentures. It is at the option of the debenture holder to exercise
their right of converting the debentures if he finds the offer beneficial.
Debenture Redemption Reserve Account
As under Section 71(4) of the Companies Act, 2013 at the time of issuing of
debentures by the company, it is mandatory for the company to create a debenture
redemption reserve account with the profits of the company which are available
for dividend and the amount added to such account can be utilized for no purpose
other than redemption of debentures.
There are certain conditions prescribed under Rule 18(7) of Companies
(Share Capital and Debentures) Rules, 2014. Under it it is obligatory for the
company to a Debenture Redemption Reserve for the purpose of redemption of
debentures, as per the conditions given below :-
(a) Creation of the Debenture Redemption Reserve shall be out of the profits of
the company available for payment of dividend.
(b) The company shall create Debenture Redemption Reserve equal to at least
50% of the money gathers through the debenture issue before debenture
(c) The creation of Debenture Redemption Reserve shall not be latter than
30thof April in each year, deposit or invest an amount which is not below 15%
of the amount of debentures maturing during the year till 31stMarch of the next
year, in one or more of the below mentioned ways:-
(i) in deposits with any scheduled bank, free from any charge or lien
(ii) in unencumbered securities of the Central Government or of any State
(iii) in unencumbered securities
(iv) in unencumbered bonds issued by any other company
(v) the amount deposited or invested as mentioned earlier is not supposed to 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 be less than
15% of the amount of the debentures maturing during the year ending on the
31st day of March of that year.
(d) 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.
(e) The amount added to such account can be utilized for no purpose other than
redemption of debentures.
A debenture is one of the capital market instruments which is utilized to raise
medium or long haul stores from open. A debenture is basically an obligation
instrument that recognizes a credit to the organization and is executed under
the normal seal of the organization. The debenture record, called Debenture deed
contains arrangements as to installment, of intrigue and the reimbursement of
important sum and giving a charge on the advantages of a such an organization,
which may give security for the installment over the a few or every one of the
benefits of the organization. Issue of Debentures is a standout amongst the most
widely recognized techniques for raising the assets accessible to the
organization. It is an imperative wellspring of back.All organizations are offered energy to obtain by their articles which settle the greatest furthest
reaches of borrowings. The ability to obtain monies and to issue debentures
(regardless of whether in or outside India) must be practiced by the Chiefs at
an appropriately gathered meeting. Where the organization obtains without the
expert presented on it by the Articles or past the sum set out in the Articles,
it is a ultra vires acquiring and henceforth void. Ultra vires borrowings can't
be sanctioned by a determination gone by the organization as a rule meeting. If
there should arise an occurrence of ultra vires borrowings the moneylender has
the accompanying cures: (an) Injunction and Recovery, (b) Subrogation, (c) Suit
against Directors. A debenture is a record given by an organization under its
seal as a confirmation of an obligation to the holder generally emerging out of
a credit and most generally secured by a charge. Debentures might be of various
types, viz. redeemable debentures, enlisted and conveyor debentures, secured and
unsecured or stripped debentures, convertible debentures. A debenture stock is
an obtained capital combined into one mass for comfort. An advance makes a
privilege in the loan boss to request reimbursement, and the substance of an
obligation is a risk upon the indebted person to reimburse the cash. A debenture
trust deed is one of the few instruments required to be executed to secure
recovery of debentures what's more, installment of enthusiasm on due dates.
Section 71(4) of the Act required each organization to make a debenture
reclamation save record to which sufficient sum should be credited out of its
benefits accessible for installment of profit until the point that such
debentures are recovered and might use the same only for recovery of a specific
set or arrangement of debentures as it were. Certificate of store is an archive
of title to a period store. Commercial paper alludes to unsecured promissory
notes issued by credit commendable organizations to get supports on a here and
Section 2(30) of Companies Act, 2013
SEBI ( Issue of Capital and Disclosure Requirements) Regulations , 2009
Securities and Exchange Board of India ( Debenture Trustees) Regulations ,
Companies ( Share Capital and Debentures) Rules, 2014
Rule 18, The Companies ( Share Capital and Debenture ) Rules, 2014
Amended vide notification no. G.S.R. 413(E), 18thjune, 2014
Non- Banking Financial ( Non- Deposit Accepting or Holding ) Companies
Prudential Norms ( Reserve Bank) Directions , 2007
Infrastructure Debt Fund Non- Banking Financial Companies ( Reserve Bank)
Directions , 2011
Rule 18, The Companies ( Share Capital and Debenture ) Rules, 2014
Rule 18, The Companies ( Share Capital and Debenture ) Rules, 2014
The Companies ( Share Capital and Debenture ) Rules, 2014
section 20 of the Indian Trusts Act, 1882
sub-clause (f) of section 20 of the Indian Trusts Act, 1882