Posted by:Arunima Bhattacharya
As per section 2(30) of The Companies Act, 2013 (“the Act) debentures include debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not. Although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital. The new definition is different from the 1956 Act as “any other securities” from section 12(2) of the Companies Act, 1956 was changed in the new definition to “any other instrument evidencing a debt”. From the definition, we can gage that debentures include both secured as well as unsecured debentures. A debenture is a document which creates or acknowledgement of a debt.
The provisions of section 179(3) of 2013 Act spell out that the power to issue debentures can be exercised on behalf of the company at a meeting of the Board of Directors. Section 71 of Chapter IV of the 2013 Act deals with the provisions relating to the issuance of debentures along with the penalties for the non compliance of the same. A company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption, but the issuance has to be approved by a special resolution passed at a general meeting. No company is allowed to issue any debentures that carry any voting rights.
Section 71 of the Act, 2013 has to be read along with Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014 ('2014 Rules') where certain conditions are prescribed to be fulfilled by a company in order to issue secured debentures. Secured debenture can be issued only if the date of its redemption is not exceeding ten years from the date of issue. However, companies engaged in the setting up of infrastructure projects have the option available to issue secured debentures for a period exceeding ten years but not exceeding thirty years. For such an issue of debentures to be executed, there has to be 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.
Where debentures are issued by a company under this section, it is necessary for the company to create a debenture redemption reserve (DRR) account out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilised by the company except for the redemption of debentures. However, it’s not mandatory for All India Financial Institutions (AIFIs) regulated by Reserve Bank of India and Banking Companies to maintain DRR account for both public as well as privately placed debentures.
No company is allowed to issue a prospectus or make an offer or invitation to the public or to its members exceeding five hundred for the subscription of its debentures, unless the company has, before such issue or offer, appointed one or more debenture trustees. The Act restricts to secure issue of debentures by way of creation of charge or mortgage in favor of the debenture trustee on any specific movable property of the company in the nature of pledge, which implies that a company cannot pledge its movable property to secure its issue.
A debenture trustee has the responsibility of protecting the interests of the debenture holders and redress their grievances in accordance with such rules as are prescribed. 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.
A debenture trustee is appointed before the issue of prospectus or letter of offer for subscription of its debentures. A debenture trust deed has to be executed not later than sixty days after the allotment of the debentures, to protect the interest of the debenture holders.
If at 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, the debenture trustee may file a petition before the Tribunal and the Tribunal may, by order, impose restrictions on the incurring of any further liabilities by the company in the interests of the debenture-holders.
The first step in the procedure of private placement of compulsory convertible debentures is to call a meeting of the Board of Directors of the Company. A notice of the Board Meeting has to be issued to all the directors of company at least 7 days before the date of the meeting. On the day the Board Meeting is held, the person to whom the debentures are issued are identified, a list of such persons is prepared, followed by the preparation of the draft offer letter under PAS-4. The Board has to pass resolution for approval of the draft offer letter, following which a notice of General Meeting is issued as per Section- 101(1) of the Act.
An extra ordinary general Meeting is held where the Offer Letter in PAS-4 Format is presented before the members of the meeting so as to pass the special resolution for the private placement of Debentures. Afterwards, the Offer Letter in PAS-4 format, accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made, is issued within 30 days of General Meeting, recording the name of such person.
The next step is to file form MGT-14 with the Registrar of Companies within 30 days of passing of Special Resolution. The notice of the General Meeting along with an Explanatory Statement, a true certified copy of special resolution, and the minutes of the General Meeting are to be attached with the form submitted with the Registrar.
Once the registrar is intimated through the form, a separate bank account for carrying out the transactions in regard to the secured debentures is opened.
The payments to be made for subscription to securities are to be made from the bank account of the person subscribing to such securities. It is the responsibility of the company to keep the record of the Bank Account from where such payment for subscription has been received.
Section 42 of the Companies Act, 2013 provides that companies shall make a private placement through the issue of a private placement offer letter. File Form GNL-2 (under MCA Specifications) has to filed with the Registrar within 30 days of circulation of offer letter, along with the extract of the extra ordinary general meeting, the Offer letter (PAS-4 format) aand the complete record of Private Placement.
Once application money is received, Call Board Meeting after receiving of application money. A Board Meeting is held where a list of the allottees is presented before the Meeting, following which a resolution for allotment (within 60 days of receiving of money) and certificate is issued in the same Meeting. Two directors authorize a person to sign the certificate.
Finally, form PAS-3 for Allotment of securities is filed (within a period of 30 days from allotment). An extract of the extra ordinary general meeting, special resolution passed by the Board, record of the private placement offer letter in PAS-5 format and the list of allottees are attached with this PAS-3 form, and finally filed with the ROC (Registrar of Companies). Thus, extensive documentation is a necessary prerequisite and characteristic of the procedure of issuing debentures.