DEBENTURE UNDER COMANIES ACT, 2013

DEBENTURE UNDER COMANIES ACT, 2013

In the Companies Act 2013, a debenture refers to a document that acknowledges a debt. It is issued by a company to individuals or institutions (debenture holders) as evidence of a loan taken by the company. Debentures are typically secured against the assets of the company and carry a fixed rate of interest.

Section 2(30) of the Companies Act 2013 provides the definition “Debenture” 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.

This definition encompasses various forms of debt instruments issued by companies, including debenture stock, bonds, or any other financial instrument that represents a debt owed by the company. It clarifies that a debenture can constitute a charge on the assets of the company, but it also acknowledges that not all debentures necessarily have this feature.

Kinds of debenture

Debentures can come in various forms, tailored to meet the specific needs of companies and investors. Here are some common kinds of debentures:

Secured Debentures: These debentures are backed by specific assets of the issuing company. In case of default, the debenture holders have a claim on the assets pledged as security.

Unsecured Debentures: Also known as “naked debentures,” these debentures are not backed by any specific collateral. In case of default, the debenture holders do not have a claim on any specific assets of the company.

Redeemable Debentures: Redeemable debentures come with a fixed maturity date, upon which the issuing company repays the principal amount to the debenture holders.

Irredeemable Debentures: Also known as perpetual debentures, these debentures do not have a fixed maturity date. They remain as debt instruments indefinitely, and the issuing company has the option to repay them at its discretion.

Convertible Debentures: Convertible debentures allow the debenture holders to convert their debt into equity shares of the issuing company after a certain period, at predetermined terms and conditions.

Non-Convertible Debentures (NCDs): Non-convertible debentures cannot be converted into equity shares. They remain as debt instruments until maturity, providing a fixed income stream to the debenture holders.

Partly Convertible Debentures: Partly convertible debentures offer a combination of both debt and equity features. Only a portion of the debentures can be converted into equity shares, while the remaining portion remains as non-convertible debt.

Zero Coupon Debentures: Zero coupon debentures do not pay periodic interest like traditional debentures. Instead, they are issued at a discount to their face value and redeemed at face value upon maturity, providing the return to the investor through capital appreciation.

Nature of debenture

Debt Instrument: At its core, a debenture is a debt instrument issued by a company or government entity to raise funds from investors. Investors who purchase debentures effectively lend money to the issuer in exchange for the promise of periodic interest payments and repayment of the principal amount at maturity.

Fixed Income Investment: Debentures provide investors with a fixed income stream in the form of periodic interest payments. The interest rate, also known as the coupon rate, is predetermined and specified in the debenture agreement.

Creditor Relationship: Debenture holders are considered creditors of the issuing company. In the event of bankruptcy or liquidation, they have a priority claim on the company’s assets ahead of equity shareholders.

Maturity and Redemption: Debentures have a specified maturity date, upon which the issuer is obligated to repay the principal amount to the debenture holders. Depending on the terms of the debenture, repayment may occur in a lump sum at maturity or through periodic instalments.

Interest Payments: Issuers are obligated to make periodic interest payments to debenture holders at predetermined intervals, typically semi-annually or annually.

Security and Collateral: Debentures may be either secured or unsecured. Secured debentures are backed by specific assets of the issuing company, providing a form of collateral that offers security to debenture holders in case of default
Flexibility and Variability: Debentures can be structured in various forms to accommodate the specific needs and preferences of both issuers and investors. They may include features such as convertibility, callability, and redemption options, providing flexibility in terms of risk and return profiles.

Condition for issuance of debenture:

Approval of Board of Directors: The board of directors of the issuing company must approve the issuance of debentures. They typically assess the company’s financial position, capital structure, and funding requirements before authorizing the issuance.

Approval of Shareholders: In many cases, the issuance of debentures requires approval from the company’s shareholders, especially if it involves significant financial commitments. Shareholders may need to vote on resolutions authorizing the issuance of debentures.

Compliance with Regulatory Requirements: Companies must comply with regulatory requirements set forth by relevant regulatory authorities such as the Securities and Exchange Commission (SEC) in the United States or the Securities and Exchange Board of India (SEBI) in India. These regulations may include disclosure requirements, registration procedures, and compliance with securities laws.

Preparation of Prospectus or Offering Circular: Companies issuing debentures to the public typically prepare a prospectus or offering circular containing detailed information about the debentures, the issuing company, its financial condition, risks associated with the investment, and other relevant disclosures. The prospectus is distributed to potential investors to enable them to make informed investment decisions.

Appointment of Trustees: Issuers of debentures often appoint trustees to represent the interests of debenture holders. The trust deed outlines the rights and obligations of the trustee, the issuer, and the debenture holders. Trustees ensure that the issuer complies with the terms and conditions of the debentures and safeguard the interests of debenture holders.

Establishment of Security or Collateral (if applicable): If the debentures are secured, the issuer must establish specific assets or collateral to secure the debentures. The terms and conditions of the debenture agreement specify the nature of the security and the rights of debenture holders in case of default.

Compliance with Accounting Standards: Issuers must comply with applicable accounting standards and regulations governing financial reporting and disclosures. Proper accounting treatment of debentures and related transactions is essential to ensure transparency and accuracy in financial statements.

Fulfilment of Listing Requirements (if applicable): If the debentures are listed on a stock exchange, the issuer must comply with listing requirements established by the exchange. This may include adherence to corporate governance standards, timely disclosure of material information, and compliance with trading rules.

Debenture redemption reserve

The DRR requirement is specified in Section 71 of the Companies Act, 2013, and it mandates certain companies to set aside funds to redeem their debentures. A brief overview of the DRR provision under the Companies Act:

Purpose: The primary purpose of the DRR is to ensure that companies have adequate funds set aside to honour their obligation to redeem debentures at maturity.

Applicability: The DRR provision applies to companies that issue debentures, whether secured or unsecured, convertible or non-convertible, redeemable or non-redeemable. However, the requirement does not apply to certain categories of companies, such as infrastructure companies, infrastructure finance companies, and non-banking financial companies.

Amount to be Transferred: Companies are required to transfer a certain percentage of their profits before declaring dividends to the DRR until the debentures are redeemed. The specific percentage and the period for which the DRR needs to be maintained are prescribed under the Companies Act and relevant rules.

Utilization of DRR: The funds held in the DRR can only be utilized for the redemption of debentures. Companies cannot use the DRR for any other purpose unless permitted by law.

Reporting and Disclosure: Companies are required to disclose details of the DRR in their financial statements and annual reports. This includes the balance in the DRR, transfers made to the DRR during the financial year, and any amounts utilized for debenture redemption.

Penalties for Non-Compliance: Failure to comply with the DRR provision may result in penalties and other legal consequences for the company and its officers.

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