This article has been written by Pallavi Jindal, a student of NEF Law College, Guwahati

INTRODUCTION:

Debentures are a type of financial instrument which helps in raising money for the company. It is a type of external borrowing whereby the money is arranged through external resources with an implied intention of returning money. It is derived from the latin word “ debere” which means to borrow money. 

According to 2(30) of the Companies Act, 2013, “Debentures” includes 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. Further it is provided that –

1. The instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; and 
2. Such other instrument, as may be prescribed by the Central Government in consultation with the Reserve Bank of India, issued by a company,

shall not be treated as debenture.

TYPES OF DEBENTURES:

The debentures are divided according to the following classifications:

1. On the basis of Convertibility of Instruments:

• Non Convertible Debentures: These debentures cannot be converted into equity shares.
• Partly Convertible Debentures: Here the part of the debenture can be converted into equity shares in the future at notice of the issuer.
• Fully Convertible Debentures: These can be fully converted into equity shares at the issuer’s notice.
• Optionally Convertible Debentures: Here the investors have an option to either convert these debentures into shares at price decided by the issuer.

2. On the Basis of Security of Instrument:

• Secured Debentures: These debentures are secured by imposing charge on the fixed assets of the issuer company.
• Unsecured Debentures: These debentures are issued without creating any charge on the assets of the company.

3. On the basis of Redemption Ability: 

• Redeemable Debentures: It refers to the debentures which are issued with a condition that the debentures will be repaid at a fixed date or upon demand or notice.
• Irredeemable Debentures: It refers to the debentures where no time is fixed for the company to repay the money.

4. On the basis of Registration of Instrument:

• Registered Debentures: Registered debentures are those debentures which are made out in the name of the person who appears on the debenture certificate and is registered by the company as debenture holder.
• Bearer Debentures : Here the company does not register the name of the debenture holder and amount of debentures in their records.

PROVISION ON ISSUE OF DEBENTURES:

Section 71 of the Companies Act, 2013 deals with issue of debentures.

(1) A company  may issue debenture  with an option to convert such debentures into shares , either wholly or partly at the time of redemption:

Provided that the issue of debentures with an option to convert such debentures into shares, wholly or partly, shall be approved by a special resolution passed at a general meeting.

(2) No company shall issue any debentures carrying any voting rights .

(3) Secured debentures may be issued by a company subject to such terms and conditions as may be prescribed.

(4) Where debentures are issued by a company under this section, the company shall create a debenture redemption reserve 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.

(5) No company shall 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 and the conditions governing the appointment of such trustees shall be such as may be prescribed.

(6) A debenture trustee shall take steps to protect the interests of the debenture-holders and redress their grievances in accordance with such rules as may be prescribed.

(7) 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:

Provided that 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 three-fourths in value of the total debentures at a meeting held for the purpose.

(8) A company shall pay interest and redeem the debentures in accordance with the terms and conditions of their issue.

(9) Where 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, 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.

(10) Where 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, 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.

 (11) A contract with the company to take up and pay for any debentures of the company may be enforced by a decree for specific performance.

(12) The Central Government may prescribe 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, quantum of debenture redemption reserve required to be created and such other matters.

CASES REFERRED :

• Director General of….vs. Deepak Fertilizers And… On 11 August,1994: In this case it was held that the debentures are not considered as goods under Section 2(e) of the Monopolies and Restrictive Trade Practices Act, 1969 before the allotment of debenture to the debenture holder and during winding up,  before the allotment the debenture holder will be entitled to principal amount as well as the interest.
• Narendra Kumar Maheshwari  vs Union of India AIR 1989 SC 2138: In this case it was held that when the company is being wound up, the debenture holder becomes eligible for the payment of principal amount.
• Sri Annapurna Cotton Mills Ltd. Vs Commissioner of Income Tax On 4 December, 1962: In this case it was held that the payment made by the assessee by issuing debentures is of a capital nature and the loan raised is considered to be as capital asset. 

REFERENCES:

• https://ca2013.com/debentures/#:~:text=Provided%20that%20the%20issue%20of,debentures%20carrying%20any%20voting%20rights%20.
• https://blog.ipleaders.in/different-types-of-debentures-use/
• Company Law Book by ICSI
• https://indiankanoon.org/docfragment/7411/?formInput=issue%20of%20debenture
• https://indiankanoon.org/doc/65796/
• https://indiankanoon.org/docfragment/1483336/?formInput=issue%20of%20debenture

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