In this blog post, Rashi Chandoke, an Associate with ANA Law Group, Mumbai, and a student, pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyzes the issuance of secured debuntures.
The Indian Companies Act, 2013 (the “Act”) defines debenture as an instrument of a company, which indicates a debt whether or not constituting a charge on the assets of the company. Debenture stock, bonds, etc., are some of the debt instruments. Debentures are instruments against which a company can raise loans. The instrument acts as an evidence of loan taken by a company. Also, it specifies the loan amount, which the company is liable to pay. A debenture in a company is a movable property, and the manner of the transfer of such movable property is stated in the articles of association (AOA) of the company.
Issue of Debentures
The Act prescribes the following conditions for issuance of debentures:
- Debentures can be issued by a company with an option to convert them into shares, partly or wholly at the time of redemption. A special resolution has to be passed in a general meeting for approval of the issuance of debentures with such an option conversion into shares.
- A company carrying voting rights cannot issue any debentures.
- Debentures can be secured or unsecured. Secured debentures impose a charge on certain assets of the company, both present, and future, upon which the debenture holders may have interest on non-payment of interest payment/repayment of loan installment. The terms and conditions of secured debentures are prescribed under the Companies (Share Capital and Debentures) Rules, 2014 (the “Debentures Rules”). Unsecured debentures are debentures, which are not backed by a collateral security, instead backed by the creditworthiness of the issuer.
- On the issue of debentures by a company, the company shall create a debenture redemption reserve account (the “DRR account”). The DRR account is created out of profits of the company available for payment of dividend. The amount credited to DRR account shall only be utilized for the redemption of debentures.
- A company cannot issue a prospectus or make an offer/invitation to public or more than five hundred (500) members for the subscription of its debentures unless the company has appointed one or more debenture trustees before such issue. The conditions governing the appointment of such trustees are prescribed under the Debentures Rules.
- The steps to be taken to protect the interest of the debenture holders and redress their grievances are also prescribed under the Debentures Rules.
- Any provision exempting or indemnify a debenture trustee against any liability for breach of trust, where the trustee fails to show due care and due diligence, shall be void. Such exemptions from the liability of debenture trustees are permitted if a majority of debenture-holders, holding not less than three-fourths (3/4th) in the value of the total debentures, permits at a meeting held for the purpose.
- The interest payment and the redemption of debentures shall be made in accordance with the issue deed/contract.
- The debenture trustee may file a petition before the National Company Law Tribunal (the “Tribunal”) if the assets of the company are insufficient or likely to become sufficient when the payment of the principal amount is due. Considering the interests of the debenture holders, the Tribunal may order or impose restrictions on the incurring of any further liabilities by the company.
- Debenture holders may issue an application to the Tribunal if a company fails to redeem the debentures on the date of their maturity or fails to pay interest on the debentures on its due date. The Tribunal, after hearing the parties concerned, may direct the company to redeem the debentures forthwith on payment of principal and interest due thereon.
- Where any default is made in complying with the order of the Tribunal under this Section, every officer in default of the company shall be punishable with an imprisonment term of maximum three (3) years or with a minimum fine of INR 2,00,000 (two lakh rupees) extendable to INR 5,00,000 (five lakh rupees) or with both.
- A decree may enforce a contract with the company to pay for any debentures of the company for specific performance.
- The Central Government has the power to prescribe rules for the procedure for securing the issue of debentures, the form of debenture trust deed, the procedure for the debenture-holders to inspect the trust deed and to obtain copies thereof, the quantum of DRR account required to be created and such other matters.
Procedure To Issue Debentures
The following is the procedure laid down to issue debentures under Sections 56, 72, of the Act read with Rule 18 and 19 of the Debentures Rules:
- To hold a board meeting to decide the nature of the debentures to be issued by the company.
- If the Company decides to issue secured debenture, the company has to comply with the condition prescribed in the Debentures Rules.
- In case appointment of a debenture trustee, the consent has to be obtained from a SEBI registered debenture trustee, who is proposed to be appointed. If debentures to be issued are Secured Debentures, a Debenture Trust Deed in Form No. SH – the company shall execute 12 or as near thereto as possible in favor of debenture trustees within sixty (60) days of allotment of Debentures.
- To pass resolutions for:
- Approval of offer letter for private placement in Form No. PAS – 4 and Application Forms (In case of private placement of debentures);
- Approval of Form No. PAS – 5 (In case of private placement of debentures);
- Approval of Debenture Trustee Agreement and appointment of a Debenture Trustee (In case of Secured Debentures only);
- Appointment of an expert for valuation (In case of private placement of debentures);
- Approval of increase of borrowing powers, if required;
- To authorize for creation of charge on the assets of the company;
- Approve the Debenture Subscription Agreement;
- To fix the day, date and time for the extraordinary general meeting of shareholders.
- Prepare the following documents:
- Debenture Subscription Agreement;
- Offer Letter for private placement in Form No. PAS – 4 and Application Forms;
- Records of a private placement offer in Form No. PAS – 5;
- Debenture Trustee Agreement;
- Mortgage Agreement for the creation of charge on assets of the company.
- Issue notices of extraordinary general meeting along with the explanatory statement.
- Hold an extraordinary general meeting and pass a special resolution to issue secured convertible debentures and increase borrowing powers of the company and to authorize the Board to create a charge on the assets of the company.
- File Form No. PAS – 4 and PAS – 5 in Form No. GNL – 2 with the Registrar of Companies.
- File Offer Letter in Form No. MGT – 14 with the Registrar of the Companies.
- File copy of Board resolutions, Special Resolution, Debenture Subscription Agreement, Debenture Trustee Agreement, etc. in Form No. MGT – 14 with the Registrar of Companies.
- File Form No. PAS – 3 (Return of allotment) with the Registrar of Companies after making allotment of debentures.
- File Form No CHG – 9 for a creation of charge on assets of the Company.
Appointment of Debenture Trustee
The Debenture Rules prescribe the following conditions for appointment of a debenture trustee:
- The names of the debenture trustees are stated in the letter of offer inviting subscription for debentures and also in all the consequent notices/communications sent to the debenture holders;
- Prior to the appointment of debenture trustee/(s), a written consent shall be obtained from such debenture trustee/(s) proposed to be appointed and a statement to that effect appears in the letter of offer issued for inviting the subscription of the debentures;
- 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. Where such vacancy is caused by the resignation of the debenture trustee, the vacancy is only filled with the written consent of the majority of the debenture holders.
- Any debenture trustee may be removed from office before the expiry of his term only if it is approved by the holders of minimum three-fourth (3/4th) in the value of the debentures outstanding, at their meeting.
Disqualifications Of A Debenture Holder
A person fulfilling the following conditions cannot be appointed as a debenture trustee:
- He/she beneficially holds shares in the issuer company; or
- He/she is a promoter, director or key managerial personnel or any other officer or an employee of the company or its holding, subsidiary or associate company; or
- He/she is beneficially entitled to money which is paid by the company otherwise than as remuneration payable to the debenture trustee; or
- He/she is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company; or
- He/she has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon; or
- He/she has any pecuniary relationship with the company amounting to 2% or more of its gross turnover or total income or INR 50,00,000 (rupees fifty lakh) or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year; or
- He/she is a relative of any promoter or any person who is in the employment of the company as a director or key managerial personnel.
Issue of Secured Debentures
The Debenture Rules prescribe the following conditions for issuing secured debentures:
- A company can issue secured debentures with a date of redemption not exceeding ten (10) years from the date of issue. Whereas, a company dealing in setting up of infrastructure projects may issue secured debentures for a period exceeding ten (10) years but not exceeding thirty (30) years.
- The issue of secured debentures is backed 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 some debentures and interest thereon.
- The company shall appoint a debenture trustee before the issue of prospectus or letter of offer for subscription of its debentures. The debenture trust deed needs to get executed within sixty (60) days after the allotment of the debentures, to protect the interest of the debenture holders.
- The security for the debentures by way of a charge or mortgage is created in favor of the debenture trustee on the following:
- Any specific movable property of the company (not being like pledge); or
- Any specific immovable property wherever situated, or any interest therein.
 Section 2 (30) of the Companies Act, 2013
 Section 44 of the Companies Act, 2013
 Section 71 of the Companies Act, 2013
 Rule 18 (2) of the Companies (Share Capital and Debentures) Rules, 2014
 Rule 18 (1) of the Companies (Share Capital and Debentures) Rules, 2014