Debentures are debt instruments issued by a Company and include debenture stock, bonds and such instruments evidencing debt raised by a Company.
Issue of debentures by a Company is governed by Section 71 of the Companies Act, 2013 and Companies (Share Capital & Debenture) Rules, 2014.
A Company may issue debentures with an option to convert them into shares either partly or fully. The provisions laid down in Section 71 of the Companies act, 2013 and Company Rules, 2014 for issue of Compulsory Convertible Debentures (CCDs) by a Company are given below:
- The issue of debentures shall be approved by a special resolution
- Debentures shall not carry any voting rights
- The debentures should be secured by a first charge or a charge ranking paripassu with the first charge on the assets of the company (excluding the intangible assets). The value of the assets charged as assessed by a registered valuer shall be equal to the amount of debentures. OR
Suchdebentures should be compulsorily convertible into shares of the company within 5 (five) years.
Issue of debentures that are not fully convertible shall comply with the following provisions:
- The debentures should be secured by a first charge or a charge ranking paripassu with the first charge on the assets of the company having a value which is sufficient for the due repayment of the amount of debentures and interest thereon.
- The debentures shall be redeemed within a period of 10 years (30 years for infrastructure companies).
- The Company shall create a Debenture Redemption Reserve account out of the distributable profits of the company. The account shall be utilised only for the purpose of redemption of reserves.
- The Company shall appoint one or more debenture trustees, if the Company makes an offer to more than 500 persons for subscription of its debentures.
From the above provisions it is concluded that, as per the provisions of Companies act, 2013 and the prescribed rules it is a must that any debentures issued by a Company should be secured. In case a company issues debentures that do not comply with the provisions mentioned above, the instruments so issued shall be considered as deposits under section 73 of the Companies act, 2013.
– Ramya Gowda
ramya@bpaindia.com