This article is written by Mridul Gupta, a student of UPES, Dehradun, on the Debentures and Debenture Trustee under Companies Act, 2013.
In business, issuing debentures is one of the ways to raise money for the working of the company. It is very different from equity shares or other kinds of shares (both preference and equity). The basic distinction being, when one buys the shares of the company he becomes the part owner of the company, but when one buys debentures issued by the company he becomes a creditor to the company. We can conclude that debenture is a kind for formal loan given to the company by another individual. The company is under obligation to repay the loan within a specified period of time with interest.
The advantage of being of being a debenture holder is that, in case of winding-up/bankruptcy the debenture holders are considered to be the creditors and they are the ones who would be re-payed first.
Issuance of debentures is one of the ways of raising debt finance for a company. Debenture is a recognized instrument used by the companies, which evidences creation of a debt, whether such debt creates a charge on the assets of the company or not. Under the Companies Act, 2013, debentures being a security, it can be issued by a private company only through the route of private placement. A company can issue debentures with an option to convert such debentures into shares, either partially or fully, at the time of redemption of the share. However, before such option is given, it must be approved by the shareholders of the company by a special resolution in the general meeting of the company. Issuance of such debentures does not give the debenture holder any voting rights.
On the basis of convertibility the debentures are of two types:
CONVERTIBLE: these are the debentures that can be converted into equity of the company on the expiry of the specified period of time.
NON-CONVERTIBLE: these are the debentures that in no case can be converted into equity shares of the company.
In case, the company opts for issuance of secured debentures, it needs to meet the following conditions:
- The date of redemption of such secured debentures should be made within 10 years from the date of issue. However, companies involved in infrastructure projects, infrastructure finance companies, infrastructure debt fund non-banking finance company can issue debentures which can be redeemed within a period not exceeding 30 years.
- Such issuance shall be secured by the creation of a charge in favour of the debenture trustee, on the properties or assets of the company (including specific movable and immovable property of the company), which must be of a sufficient value needed for the due repayment of the amount of debentures and the interest.
- The company shall appoint a debenture trustee before the issue of prospectus or letter of offer for subscription of its debentures.
- The company shall execute a debenture trust deed to protect the interest of the debenture holders within sixty days from the date of allotment.
The company issuing debenture must create a debenture redemption reserve (DRR) account out of the profits of the company, which will be utilized only for the redemption of debentures. However, All India Financial Institutions (AIFIs) regulated by Reserve Bank of India and Banking Companies are not required to maintain DRR account for both public as well as privately placed debentures. NBFCs and companies engaged in manufacturing and infrastructure enjoys certain relaxation regarding maintenance of DRR account reserves.
If a company is issuing secured debentures or making an offer, or issue prospectus for more than 500 subscriptions of its debentures, it must appoint one or more debenture trustee as per the conditions laid down in the Companies (Share Capital and Debentures) Rules, 2014.
Informally debenture trustee is a person who is responsible for issuance and distribution of debentures. A debenture trustee is a person or entity that serves as the holder of debenture stock for the benefit of another party. When a company is looking to raise capital, one method of accomplishing this is by issuing stock as a form of debt with the obligation to repay the debt at a specific interest rate. The trustee serves as a liaison (the person who keeps in contact with different groups) between the company that issued the debentures and the debenture holders that are collecting interest payments.
According to SEBI Rules, 1993- “debenture trustee” means a trustee of a trust deed for securing any issue of debentures of a body corporate [section 2 (bb)]. (Applicable to public companies only)
Eligibility for a debenture trustee: To act as debenture trustee, the entity should either be a scheduled bank carrying on commercial activity, a public financial institution, an insurance company, or a body corporate. The entity should be registered with SEBI to act as a debenture trustee.
Duties, rights and liabilities of a debenture trustee:
All appointment to be made of the debenture trustee(s) shall be made under section 71 of the Companies Act, 2013.
- Section 18 (c) a company in no cases can issue debentures before appointment of a debenture trustee.
- The company cannot issue debentures before obtaining the consent of the debenture trustee.
- The company has to specify the name of the name of the debenture trustee in the offer letter.
- The debenture trustee can call for periodical performance report of the company
- The trustee can call for reports regarding the use of funds raised through issue of debentures.
- The trustee can 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.
- The trustee can appoint a nominee to board of director of the company.
- Before the trustee appoints the nominee the conditions must be satisfied:
1. two consecutive defaults in payment of interest to the debenture holders; or
2. default in creation of security for debentures; or default in redemption of debentures
- No one can be appointed as a debenture trustee if he has a share ownership in the company.
- He cannot be appointed if he is a promoter of the company, employee or the manager.
- No appointment for Creditor to the company.
- The vacancy of the debenture can be filled by the company by the consent of the other trustees.
- The trustee ensures that there is no breach in the terms of issue of debentures.
- The trustee can take steps to remedy the breach (above mentioned).
- The trustee is the person who informs the debenture holders about such breach.
- The trustee ensures that all the condition regarding creation of security for debentures is met
- The trustee convenes the meeting between the company and the debenture holders
- The trustee is the person who ensures that the debentures are redeemed as per the conditions agreed upon.
- The trustee can take steps to resolve the dispute between the company and the holders
- The trustee has to take necessary steps to ensure the interest of the debenture holders
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