DEBENTURES

INVESTMENT LAW
5 TH Y E A R
SEMANTI CHOUDHURY
 What is a Debenture?
 As per Sec.2(30) of the CA,2013,”Debenture” includes
debenture stock, bonds or any other instrument of the
company evidencing a debt, whether constituting a
charge on the assets of the company or not.
 A company may issue debentures with an option to
convert such debentures into shares, either wholly or
partly at the time of redemption, which shall be
approved by a special resolution passed at a general
meeting.
 No company shall issue any debentures
carrying any voting rights.
 Section 71 + Companies (Share Capital and
Debentures) Rules, 2014
 Conditions for issue of secured
debentures
The company shall not issue secured debentures, unless it complies
with the following conditions, namely:-
1.Term of Debentures:
 An issue of secured debentures may be made, provided the date of
its redemption shall not exceed 10 years from the date of issue.
 If a company engaged in the setting up of infrastructure projects
may issue secured debentures for a period exceeding 10 years but
not exceeding 30 years
2.Secured by charge:

 An issue of debentures shall be secured by the creation of a charge,

on the properties or assets of the company, having a value which is
sufficient for the due repayment of the amount of debentures and
interest thereon.
3.Appoint Debenture Trustee:
The company shall appoint a debenture trustee before the issue
of prospectus or letter of offer for subscription of its
debentures and not later than 60 days after the allotment of
the debentures, execute a debenture trust deed to protect the
interest of the debenture holders.
4.Charge/Mortgage in favour of Debenture Trustee:
The security for the debentures by way of a charge or mortgage
shall be created in favour of the debenture trustee on-
(i) any specific movable property of the company (not being in
the nature of pledge); or
(ii) any specific immovable property wherever situate, or any
interest therein.
 Conditions for appointment of
Debenture Trustees:
 No company shall issue a prospectus or make an offer or invitation
to the public or to its members exceeding 500 for the subscription
of its debentures, unless the company has, before such issue or
offer, appointed one or more debenture trustees
 The company shall appoint debenture trustees after complying with
the following conditions, namely:-
 (a) the names of the debenture trustees shall be stated in
letter of offer inviting subscription for debentures and also in all
the subsequent notices or other communications sent to the
debenture holders;
 (b) before the appointment of debenture trustee or trustees, a
written consent shall be obtained from such debenture
trustee or trustees proposed to be appointed and a statement to
that effect shall appear in the letter of offer issued for inviting the
subscription of the debentures;
(c) A person shall not be appointed as a debenture trustee, if he-
(i) beneficially holds shares in the company;
(ii) is a promoter, director or KMP or any other officer or an
employee of the company or its holding, subsidiary or associate
company;
(iii) is beneficially entitled to moneys which are to be paid by the
company otherwise than as remuneration payable to the debenture
trustee;
(iv) is indebted to the company, or its subsidiary or its holding or
associate company or a subsidiary of such holding company;
(v) has furnished any guarantee in respect of the principal debts
secured by the debentures or interest thereon;
(vi) has any pecuniary relationship with the company amounting to
2% or more of its gross turnover or total income or Rs.50 Lakhs or such
higher amount as may be prescribed, whichever is lower, during the two
immediately preceding financial years or during the current financial
year;
(vii) is relative of any promoter or any person who is in the
employment of the company as a director or KMP.
 (d) the Board may fill any casual vacancy in the office of the
trustee but while any such vacancy continues, the remaining trustee or
trustees, if any, may act
 If such vacancy is caused by the resignation of the debenture trustee, the
vacancy shall only be filled with the written consent of the majority of the
debenture holders.
 (e) any debenture trustee may be removed from office before the
expiry of his term only if it is approved by the holders of not less
3/4th in value of the debentures outstanding, at their meeting
 Inspection of Trust Deed:
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.

 Copies of Trust Deed:

A copy of the trust deed shall be forwarded to any member or debenture
holder of the company, at his request, within 7 days of the making thereof,
on payment of fee
 Duties of Debenture Trustee:
 It shall be the duty of every debenture trustee to-
 (a) satisfy himself that the letter of offer does not contain
any matter which is inconsistent with the terms of the
issue of debentures or with the trust deed;
 (b) satisfy himself that the covenants in the trust deed
are not prejudicial to the interest of the debenture
holders;
 (c) call for periodical status or performance
reports from the company;
 (d) communicate promptly to the debenture holders
defaults, if any, with regard to payment of interest or
redemption of debentures and action taken by the
trustee therefor;
 (e) appoint a nominee director on the Board of the company in the event of-
(i) 2 consecutive defaults in payment of interest to the debenture holders;
(ii) default in creation of security for debentures; or
(iii) default in redemption of debentures
 (f) ensure that the company does not commit any breach of the terms of issue
of debentures or covenants of the trust deed and take such reasonable steps as
may be necessary to remedy any such breach;
 (g) inform the debenture holders immediately of any breach of the terms of
issue of debentures or covenants of the trust deed;
 (h) ensure the implementation of the conditions regarding creation of security
for the debentures, if any, and debenture redemption reserve;
 (i) ensure that the assets of the company issuing debentures and of the
guarantors, if any, are sufficient to discharge the interest and principal
amount at all times and that such assets are free from any other encumbrances
except those which are specifically agreed to by the debenture holders;
 (j) do such acts as are necessary in the event the
security becomes enforceable;
 (k) call for reports on the utilization of funds raised by the issue
of debentures-
 (l) take steps to convene a meeting of the holders of
debentures as and when such meeting is required to be held;
 (m) ensure that the debentures have been converted or
redeemed in accordance with the terms of the issue of
debentures;
 (n) perform such acts as are necessary for the protection of the
interest of the debenture holders and do all other acts as are
necessary in order to resolve the grievances of the debenture
holders.
Convening Meeting of Debenture holders
by Debenture Trustee :
 The meeting of all the debenture holders shall be
convened by the debenture trustee on-
 (a) requisition in writing signed by debenture
holders holding at least 1/10th in value of the
debentures for the time being outstanding;
 (b) the happening of any event, which constitutes a
breach, default or which in the opinion of the
debenture trustees affects the interest of the
debenture holders
 Liability of Debenture Trustee:

 Any provision contained in a trust deed for securing the

issue of debentures, or in any contract with the
debenture-holders secured by a trust deed, shall be void
in so far as it would have the effect of exempting a trustee
thereof from, or indemnifying him against, any liability
for breach of trust, where he fails to show the degree of
care and due diligence required of him as a trustee,
having regard to the provisions of the trust deed
conferring on him any power, authority or discretion.
 The liability of the debenture trustee shall be subject to
such exemptions as may be agreed upon by a majority of
debenture-holders holding not less than 3/4th in value of
the total debentures at a meeting held for the purpose.
 Creation of Debenture Redemption
Reserve A/c:
 The company shall create a Debenture Redemption
Reserve for the purpose of redemption of
debentures, in accordance with the conditions given
below;
 (a) the Debenture Redemption Reserve shall be
created out of the profits of the company available
for payment of dividend;
 (b) the company shall create Debenture Redemption
Reserve equivalent to at least 50% of the amount
raised through the debenture issue before debenture
redemption commences
 (c) every company required to create Debenture
Redemption Reserve shall on or before the 30th day of
April in each year, invest or deposit, as the case may be, a
sum which shall not be less than 15%,of the amount of its
debentures maturing during the year ending on the 31st
day of March of the next year, 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 CG or of any SG;
 (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 is
notified under sub-clause (f) of section 20 of the Indian Trusts Act,
1882;
 (v) 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:
The amount remaining invested or deposited, as the case may be,
shall not at any time fall below 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 credited to the Debenture Redemption Reserve shall
not be utilised by the company except for the purpose of redemption
of debentures.
 Redemption of Debentures:
 A company shall pay interest and redeem the debentures in accordance with the
terms and conditions of their issue.
 Debenture Trustee file petition before Tribunal:
 The debenture trustee may file a petition before the Tribunal-
 If any time the debenture trustee comes to a conclusion that the assets of the
company are insufficient or are likely to become insufficient to discharge the
principal amount as and when it becomes due.
 Order by Tribunal:
 The Tribunal may, after hearing the company and any other person interested in
the matter, by order, impose such restrictions on the incurring of any further
liabilities by the company as the Tribunal may consider necessary in the interests of
the debenture-holders.
 The Tribunal may, on the application of any or all of the debenture-holders, or
debenture trustee and, after hearing the parties concerned, direct, by order, the
company to redeem the debentures forthwith on payment of principal and interest
due thereon–
 If a company fails to redeem the debentures on the date of their maturity or fails to
pay interest on the debentures when it is due.