1. MEANING OF DEBENTURES
Section 2(12) of the Companies
Act defines the term "debenture" which includes debenture stock,
bonds and any other securities of a Company, whether constituting a charge on
the assets of the Company or not.
In a simple meaning, a debenture
means a document, which either creates a debt or acknowledges it, any document
which fulfills either of these conditions is a debenture. It may be defined as
a certificate of debt or loan given under the common seal of the Company
evidencing that the Company undertakes to pay specified amount with interest.
A debenture means a document,
which creates or acknowledges a debt. Debentures may be for fixed term of years
or repayable on notice. They can legally be framed as payable to bearer.
Debentures are not part of share capital, it is a loan capital and Company
is liable to pay interest thereon whether there are profits or not. Debentures
may be secured by way of creating charge on the assets of the Company or by way
of mortgage of Company's property.
It may be noted that a mortgage
of land has been held to be a debenture.
2. BASIC CHARACTERISTICS OF DEBENTURES
Debenture as a method of raising
loan capital is an equally important part of project financing along with share
capital. Following are some of the salient features of debentures:—
(i) It is a document containing
an acknowledgement of indebtedness. (ii) Debentures are issued in form of
certificates.
(iii) Debenture may be secured or
unsecured. Debentures need not necessarily create a charge on the Company's
assets. Section 2(12) provides that debenture may or may not constitute a
charge on the assets of the Company.
(iv) Debentures are generally
issued under the common seal of the Company.
(v) Debentureholders do not have
any right to vote at any meeting of the Company. In terms of provisions of
section 117 of the Act, no Company shall, after the commencement of this Act,
issue any debentures carrying voting rights at any meeting of the Company,
whether generally or in respect of particular classes of business.
(vi) Debentures may be
convertible or non-convertible.
(vii) Debentures may or may not
be one of a series.
(viii) Debentures carry interest
at a fixed rate.
3. FORM OF DEBENTURES
The forms of 'debenture' are:
(i) simple
acknowledgement of debt under seal;
(ii) acknowledgement of debt and charging of the
property of the Company with repayment;
and
(iii) acknowledgement of debt
charging the property with repayment and further restricting the Company from giving any prior
charge
4. TYPES OF DEBENTURES
Debentures may be classified into
various categories according to the securities, option, negotiability, etc
attached with them in terms of their issue. These are as follows:—
Classification on the basis of security
There are following types of
debentures on the basis of security:—
(a) Secured debentures.—Debentures issued by a Company may be
secured by way of creating charge on the assets of the Company. Debentures may
be secured by way of mortgage of Company's properties.
The secured debenture holders
have greater protection. Holders of secured debentures remain convinced about
the payment of interest and payment of principal in the event of redemption.
(b) Unsecured debentures—these debentures are also known as naked
debentures. These debentures are not secured by way of charge on the Company's
assets. Interest rate payable on unsecured debentures is generally higher than
that which is payable on secured debentures. In the case of unsecured
debentures the Company must ensure compliance with the provisions of the
Companies (Acceptance of Deposits) Rules, 1975 since the unsecured debentures
are treated as 'deposits' for the purposes of Companies (Acceptance of
Deposits) Rules, 1975.
Rule 2(b)(x) of the Companies (Acceptance of Deposits) Rules, 1975
provides that amount raised by the issue of bonds or debentures secured by the
mortgage of any immovable property of the Company or with an option to convert
them into shares of the Company, does not constitute a deposit under section
58A. The Department of Company Affairs has clarified vide Circular No. 4/12/8-
11CL -X, dated 10-3-1980 that in case of unsecured debentures with an option to
convert a part of them into shares only the convertible portion of the debenture
is exempt in terms of the provisions of rule 2(b)(x).
4.2. Classification on the basis of negotiability
Debentures issued by a Company
may be negotiable or non-negotiable. There are following two types of
debentures:—
(a) Bearer debentures— These debentures are payable to bearer of
the debentures and transferable by mere delivery. These debentures are also
known as unregistered debentures.
(b) Registered debentures—These debentures are not transferable by
mere delivery of debenture certificates and shall be transferred as per the
provisions of the Companies Act, by executing transfer deeds and the transfer
registered by the Company. Registered debentures are not negotiable
instruments. A registered holder of a debenture means a person whose name appears
both in the debenture certificate and in the register of debenture holders.
Principal and interest amount, when due in respect of these debentures are
payable to the registered holders thereof only.
4.3 Classification on the basis of redemption or payment
It may be classified in the
following categories:—
(a) Redeemable debentures—Redeemable debentures are those
debentures which will be paid after a pre-fixed time.
(b) Irredeemable debentures — These debentures are also called and
known as perpetual debentures. Section 120 deals with perpetual debentures. It
reads as under:
A condition contained in any
debentures or in any deed for securing any debentures, whether issued or
executed before or after the commencement of this Act, shall not be invalid by
reason only that thereby, the debentures are made irredeemable or redeemable
only on the happening of a contingency, however remote, or on the expiration of
a period, however long.
4.4. Classification on the basis of convertibility
These debentures are issued by a Company
on the basis of option provided to them for conversion of debenture in the
equity shares of the Company after a certain period. It may be classified in
the following categories:—
(a) Fully convertible debentures (FCDs).—These debentures are
converted into equity shares of the Company on the expiry of a specified
period.
(b) Partly convertible debentures (PCDs)—Partly convertible
debentures are divided into two portions, viz., convertible and non-convertible
portion. The convertible portion is converted into equity shares of the Company
at the expiry of specified period. The non-convertible portion is redeemed at
the expiry of the specified period in terms of there issue.
(c) Non-convertible debentures (NCDs)—Non-convertible debentures do
not have any option to convert the same into equity shares and are redeemed at
the expiry of specified period(s).
5. SECURITY FOR DEBENTURES
Debentures are normally secured
by a charge on the undertaking of the Company and all its property, present and
future. If the debentures give no security on the assets of the Company, the
debenture holder's position is no better than that of an unsecured creditor.
[Spiral Globe Ltd. (1902) 1 Ch 396] Where debentures are secured by mortgage of
immovable property or hypothecation or pledge of movable property, they
constitute actionable claims. The charge may either be 'fixed' or 'floating'. A
fixed charge affects the title in the property and therefore the Company can
deal with the property only subject to the charge. In the case of floating
charge, the Company is free to deal with the property in the ordinary course of
business. [Florence Land Co. (1878) 10 Ch D 530; Wheatley v Silkstone &
Coal Co. (1885) 25 Ch 715]
Debentures may be issued and kept
with the Company's bankers as collateral security in respect of loans obtained
from banks. [Samuel v Jarrah Timber Corporation (1904) AC 330]
6. ISSUANCE OF DEBENTURES WITH WARRANT OPTION
A Company may issue the
convertible debentures, whether fully convertible or partly convertible with
detachable warrant. The warrant gives a right to the holder to get equity
shares mentioned in the warrant after the expiry of a certain period at a price
not exceeding the price fixed in the warrant.
7. ISSUE OF DEBENTURES AT A DISCOUNT
There is no prohibition to issue
debentures at a discount unlike the restrictions contained in section 79 of the
Companies Act, 1956 for the issue of shares at a discount. But where the
debentures are convertible into equity shares, the conversion shall be at par
or above the nominal value of the equity shares unless the provisions of
section 79 are complied with.
Where a Company proposes to issue debentures at a discount giving
option to the debenture holders to exchange them at any time prior to their
maturity for fully paid shares of the Company equivalent to the nominal value
of debentures, the Company can be restrained by an injunction from issuing
debentures if the scheme as it stands, even if it is an honest one is capable
of being used for the purpose of acquiring fully paid shares at a discount.
[Moseley v Koffyfontein Mines Ltd (1904) 73 KJ Ch 108]
8. POWERS TO PAY COMMISSION
Pursuant to section 76 of the
Companies Act, it is permissible to pay commission at a rate not exceeding 2.5%
of the price at which the debentures are proposed to be issued provided the
payment of commission is authorized by the Articles of Association. No
commission shall be paid on debentures which are not offered to the public.
Further, it is also provided in
section 76 that in the case of issue of debentures to the public, the amount or
rate percent of the commission and the number of debentures which persons have
agreed on commission to subscribe absolutely or conditionally shall be
disclosed in the prospectus. Copy of the contract for the payment of the
commission is delivered to the Registrar at the time of delivery of the
prospectus or the statement in lieu of prospectus for registration.
9. INTEREST ON DEBENTURES
Interest rate in respect of debentures is freely determinable by the
issuer Company. Even zero rate of interest debentures can be issued. Companies
may pay interest on debentures at a rate which seems to be reasonable to them.
The interest may be paid quarterly, half-yearly or on any other terms of its
issue. Interest payable on debentures is debited to profit and loss account for
arriving at taxable profits under the Income-tax Act, 1961.
10. PROHIBITION ON ISSUANCE OF DEBENTURES CARRYING VOTING RIGHTS
Section 117 provides that no Company
shall issue any debentures carrying voting rights at any meeting of the Company,
whether generally or in respect of particular class of business.
11. DEBENTURES v DEPOSITS
RULES
In terms of rule 2(b)(x) of the
Companies (Acceptance of Deposits) Rules, 1975, any amount raised from the
public by the issue of bonds or debentures secured by mortgage of any immovable
property of a Company or any amount raised by the issue of fully convertible
debentures (FCDs) or partly convertible debentures (PCDs), the non-convertible
portion being secured as above, will not come under the purview of the said
rules provided the value of the debentures or bonds does not exceed the market
value of the property and assets charged. But any amount raised by issue of
unsecured debentures or debentures secured by other assets will be treated as
deposit and governed by the said rules.
12. Debentures v NBFC Acceptance of Deposits (RBI) Directions, 1998
According to the above
directions, the amount raised by issue of debentures secured either by
immovable property or by other assets of the borrowing Company will not come
under the above directions as well as issue of FCDs and PCDs. In the above
cases the value of debentures or bonds shall not exceed the market value of the
immovable property/assets.
13. Listing of debentures under section 73
A listed Company, which proposes
to issue debentures to the public, shall make the debentures enlisted in a recognized
Stock Exchange. It shall, before issuing the prospectus for such issue, make
the application to the Stock Exchange concerned and the permission must be
obtained before the expiry of ten weeks from the date of the closing of the
subscription. It is not a condition that only a listed Company can make a
public issue of debentures. According to SEBI Guidelines it is possible to make
an initial offer of debentures to the public subject to the conditions
specified.
14. Issue of PCDs or FCDs requires other approvals
Where a Company proposes to issue
PCDs or FCDs, such a proposal requires the prior approvals of the shareholders
by special resolution and of the Central Government pursuant to the provisions
in Section 81(3) (b).
Norms applicable for issue of
rights shares are to be followed in case of issue of
convertible/non-convertible debentures on rights basis. [Stock Exchange
Division No. F-1/22/SE/87, dated 6 May, 1987]
15. Public Companies (Term of
Issue of Debentures and Raising of Loans with Option to convert such Debentures
or Loans into Shares) Rules, 1997
Pursuant to the above Rules, the
approval of the Central Government for conversion of debentures and loans into
equity shares in terms of clause (a) of the proviso under section 81(3)(b) of
the Companies Act, 1956 will not be necessary if the terms of conversion are as
follows:
(a) The debentures are issued or
loans are raised either through private subscription or issue of a prospectus
to the public;
(b) A public financial
institution or scheduled bank either underwrites the above issue or subscribes
to the issue of debentures, either wholly or in part or sanctions the whole or
part of the loan; and
(c) The right of conversion may
be at par or at a premium not exceeding 25% of the nominal value of the shares.
Issue of convertible debentures
within the above Rules will, therefore, require only the approval of
shareholders by special resolution before the issue is made and the approval of
the Board in terms of section 292.
15.1 Issues of PCDs/FCDs or Convertible Loans where Government approval
and approval of Shareholders is necessary
On the basis of the Rules quoted
above, where a Company proposes to offer convertible debentures to the public
in which no all-India public financial institution participates in any way,
such issues will need the approval of the Central Government and the approval
of the Company in general meeting will be necessary by special resolution.
Similarly, where it is proposed to raise loans convertible into equity from an
institution other than a public financial institution, such a proposal also
need the prior approval referred to above. Further where the equity shares are
proposed to be issued on conversion of debentures or bonds or loans at a rate
exceeding 25% of the face value of the shares, whether underwritten or not or
subscribed by a public financial institution or not, the approvals of the
Central Government and the Company in general meeting by special resolution
will be necessary. Issue of PCDs and FCDs in certain circumstances may be in
accordance with SEBI Preferential Allotment Regulation.
15.2 Government approval when not
needed
Some are of the view that when,
in terms of the issue of convertible debentures, a Company holds unconditional
right to convert the debentures into equity shares as per the conditions of
issue and the debenture holders have no option but to accept the conversion, no
approval of the Central Government will arise in such a case as there is no
option for the shareholders to convert but a special resolution of members is
necessary before the issue is made under the proviso of section 81(3) (b). But
in a listed Company according to SEBI Guidelines option should be given to
shareholders to exercise or not to exercise conversion option.
15.3 Total exemption to convert
debentures or loans into shares in respect of institutions
Pursuant to the proviso (b) of
section 81(3)(b), issues of convertible debentures to and raising of loans
partly convertible into shares from the following institutions are exempt from
the prior approval of members by special resolution, but the prior approval of
the Central Government would appear to be necessary.1
(i) The Industrial Finance
Corporation of India ,
established under the Industrial Finance Corporation Act, 1948;
(ii) The Life Insurance
Corporation of India ,
established under the Life Insurance Corporation Act, 1956;
(iii) The Unit Trust of India , established under the Unit
Trust of India Act, 1963;
(iv) The Industrial Development
Bank of India ,
established under the Industrial Development Bank of India Act, 1964;
(v) The Industrial Credit and
Investment Corporation Limited, a Company registered under the Companies Act,
1913;
(vi) The Industrial
Reconstruction Corporation of India ,
established under the Industrial Reconstruction Bank of India Act, 1984;
(vii) The General Insurance
Corporation of India ,
established under the General Insurance Business (Nationalisation) Act, 1972;
(viii) The National Insurance Company Limited,
formed and registered under Companies Act, 1956;
(ix) The New India Assurance Company
Limited, formed and registered under the Companies Act, 1956;
(x) The Oriental Fire and General
Insurance Company Limited, formed and registered under the Companies Act, 1956;
(xi) The United Fire and General
Insurance Company Limited, formed and registered under the Companies Act, 1956;
(xii) Risk Capital &
Technology Finance Corporation Limited; (xiii) Tourism Finance Corporation of
India Ltd.;
(xiv) Shipping Credits & Investment Company of
India Ltd.;
(xv) Technology Development & Information Company
of India Ltd.
15.4 Conversion period for debentures
A Company shall not issue fully convertible debentures having a
conversion period of more than 36 months, unless conversion is made optional
with "put" and "call" option. [Clause 10.8.1]
If the conversion takes place at or after 18 months from the date of
allotment, but before 36 months, any conversion in part or whole of the
debenture shall be optional at the hands of the debenture holder. [Clause
10.8.2]
No issue of debentures by a Company shall be made for acquisition of shares
or providing loan to any Company belonging to the same group. It shall not
apply to the issue of fully convertible debentures providing conversion within
a period of eighteen months. [Clause 10.8.3]
16. Secured debentures shall be
issued with the trust deed
The issue of debentures is
generally secured by a debenture trust deed by which the property forming the
security is charged by way of mortgage to the trustees. The trust deed provides
the terms and conditions on which the charge is held and may be enforced. The
debenture trust deed shall be executed within six months of the closure of the
issue.
Execution of debenture trust deed
brings a plethora of benefits both for the debentureholders and the Company.
Sections 117A, 117B and 117C of
the Companies Act, 1956 relating to Debenture Trust Deed are reproduced as
below:—
16.1 Debenture trust deed
Section 117A of the Act deals with Debenture Trust Deed. The provisions
are as under:—
— a trust deed for securing any
issue of debentures shall be in such form and shall be executed within such
period as may be prescribed;
— a copy of the trust deed shall
be open to inspection to any member or debenture holder of the Company and he
shall also be entitled to obtain copies of such trust deed on payment of such
sum as may be prescribed;
— if a copy of the trust deed is
not made available for inspection or is not given to any member or
debentureholder, the Company and every officer of the Company who is in a
default, shall be punishable, for each offence, with fine which may extend to
five hundred rupees for every day during which the offence continues.
Pursuant to Reg. 14 of the SEBI
Debenture Trustee Regulations, the Debenture Trust shall ensure that the Trust
Deed contains the matters specified in the Schedule IV to the said Regulations.
Where the requirements set out in
a debenture trust deed were basically for the Company's benefit and
administrative convenience, the Company would be entitled to waive the
requirement imposed for its benefit.
16.2 Appointment, functions and
duties of debenture trustee
Section 117B of the Act deals
with the terms of appointment and duties of the debenture trustee which may be
discussed as under:—
(a) Compulsory appointment of
debenture trustees.—No Company shall issue a prospectus or a letter of offer to
the public for subscription of its debentures, unless the Company has, before
such issue, appointed one or more debenture trustees for such debentures and
the Company has, on the face of the prospectus or the letter of offer, stated
that the debenture trustee or trustees have given their consent to the Company
to be so appointed:
Provided that no person shall be
appointed as a debenture trustee, if he— (i) beneficially holds shares in the Company;
(ii) is beneficially entitled to
moneys which are to be paid by the Company to the debenture trustee;
(iii) has entered into any
guarantee in respect of principal debts secured by the debentures or interest
thereon.
(b) Functions of debenture
trustees.—Subject to the provisions of this Act, the functions of the debenture
trustees shall generally be to protect the interest of holders of debentures
(including the creation of securities within the stipulated time) and to
redress the grievances of holders of debentures effectively.
(c) Duties of debenture
trustees.—In particular, and without prejudice to the generality of the
foregoing functions a debenture trustee may take such other steps as he may
deem fit—
(i) to ensure that the assets of
the Company issuing debentures and each of the guarantors are sufficient to
discharge the principal amount at all times;
(ii) to satisfy himself that the
prospectus or the letter of offer does not contain any matter which is
inconsistent with the terms of the debentures or with the trust deed;
(iii) to ensure that the Company
does not commit any breach of covenants and provisions of the trust deed;
(iv) to take such reasonable
steps to remedy any breach of the covenants of the trust deed or the terms of
issue of debentures;
(v) to take steps to call a
meeting of holders of debentures as and when such meeting is required to be
held.
Section 117B(4) provides that
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 Company Law Board and the Company Law
Board may, after hearing the Company and any other person interested in the
matter, by an order, impose such restrictions on the incurring of any further
liabilities as the Company Law Board thinks necessary in the interests of
holders of the debentures.
16.3 Liability of Company to
create security and debenture redemption reserve
Section 117C of the Act, 1956
deals with 'liability of Company to create security and debenture redemption
reserve' which has been provided as under:—
(a) Creation of debenture
redemption reserve.—Where a Company issues debentures after the commencement of
this Act, it shall create a debenture redemption reserve for the redemption of
such debentures, to which adequate amounts shall be credited, from out of its
profits every year until such debentures are redeemed.
(b) Utilisation of reserve.—The
amounts credited to the debenture, redemption reserve shall not be utilised by
the Company except for the purpose aforesaid.
The Department of Company affairs
has clarified vide General Circular No. 9/2002 No. 6/3/2001-CL.V, dated
18-4-2002 that one of the measures that the Central Government took to protect
the interests of small investors in Companies Act was to insert section 117C in
the Companies (Amendment) Act, 2000 which contemplates the creation of security
and liquidity to ensure timely repayment by companies on redemption of
debentures and thereby afford protection to the debentureholders.
Section 117C requires every Company
to create a Debenture Redemption Reserve (DRR) to which 'adequate amounts'
shall be credited out of its 'profits' every year until such debentures are
redeemed, and shall utilise the same exclusively for redemption of a particular
set or series of debentures only. Thus, the quantum of DRR to be created before
the redemption liability actually arises in normal circumstances should be
'adequate' to pay the value of debentures plus accrued interest (if not already
paid), till the debentures are redeemed and cancelled. Since the section
requires that the amount to be credited as DRR will be carved out of profits of
the Company only, there is no obligation on the part of the Company to create
DRR if there is no profit for the particular year.
The Department of Company Affairs
(DCA) has received a number of representations from Public Financial
Institutions, Non-Banking Financial Companies, Professionals, FICCI, CII,
Chambers, etc. seeking clarifications in this regard.
The matter was considered keeping
in view the purpose of the introduction of section 117C and the genuine
problems likely to be caused to the NBFCs, All India Financial Institutions
(AIFIs) and banks that deal in financial products and would find it difficult
to create DRR after transferring 20% of the profits to Reserve Fund out of the
divisible profits as already required by RBI norms.
After taking into consideration
the RBI directions/regulations on prudential norms applicable to banking
companies, AIFIs and NBFCs, and the SEBI (Disclosure and Investor Protection)
Guidelines, 2000, the Government hereby clarifies on adequate DRR and other
related matters as under:—
(i) No DRR is required for
debentures issued by All India Financial Institutions (AIFIs) regulated by
Reserve Bank of India and Banking Companies for both public as well as
privately placed debentures. For other FIs within the meaning of section 4A,
DRR will be as applicable to NBFCs registered with RBI.
(ii) For NBFCs registered with
the RBI under section 45-IA of the RBI (Amendment) Act, 1997, 'the adequacy' of
DRR will be 50% of the value of debentures issued through public issue as per
present SEBI (Disclosure and Investor Protection) Guidelines, 2000 and no DRR
is required in the case of privately placed debentures.
(iii) For manufacturing and
infrastructure companies, the adequacy of DRR will be 50% of the value of
debentures issued through public issue and 25% for privately placed debentures.
(iv) Section 117C will apply to
debentures issued and pending to be redeemed and as such DRR is required to be
created for debentures issued prior to 13-12-2000 and pending redemption
subject to clarifications issued herein.
(v) Section 117C will apply to
non-convertible portion of debentures issued whether they are fully or partly
convertible.
16.4 Debenture Redemption Reserve
(DRR) — Clarification1
(a) In continuation to this
Department's General Circular No. 9/2002, dated 18-4-2002, it is clarified that
for Housing Finance Companies registered with the National Housing Bank under
Housing Finance Companies (NHB) Directions, 2001, "the adequacy" of
Debenture Redemption Reserve (DRR) will be 50% of the value of debentures
issued through public issues and no DRR is required in the case of privately
placed debentures.
(b) Payment of interest in case
of failure to redeem.—The Company referred to in sub-section (1) shall pay
interest and redeem the debentures in accordance with the terms and conditions
of their issue.
(c) Power of Company Law Board in
case of failure to redeem.—Where a Company fails to redeem the debentures on
the date of maturity, the Company Law Board may, on the application of any or
all the holders of debentures shall, after hearing the parties concerned,
direct, by order, the Company to redeem the debentures forthwith by the payment
of principal and interest due thereon.
(d) Penalty for default.—If
default is made in complying with the order of the Company Law Board under
sub-section (4), every officer of the Company who is in a default, shall be
punishable with imprisonment which may extend to three years and shall also be
liable to a fine of not less than five hundred rupees for every day during
which such default continues.
17. Re-payment of Debentures
Normally, the debentures are for
a specified period. They have to be repaid. There cannot be a log on equity of
redemption. [Cuban
Land
Where the debenture becomes
enforceable on the happening of certain events, the debenture-holders have a
right to require payment on the happening of those events, but they do not put
the debenture-holders in a position of being compelled to accept payment. When
the events are entirely within the control of the Company, it cannot by
determining the event, compel the debenture-holders to accept their money at a
moments notice. [General Motor Cap No. 2 (1942) 56 Sol. Jo 573]
18. Power to re-issue redeemed
debentures
Section 121 contains elaborate
provisions concerning power to re-issue redeemed debentures in certain cases.
Accordingly, where a Company has redeemed any debentures previously issued
then:—
(a) unless any provision to the
contrary, whether express or implied, is contained in the articles, or in the
conditions of issue, or in any contract entered into by the Company; or
(b) unless the Company has by
passing a resolution to that effect or by some other act, manifested its
intention that the debentures shall be cancelled;
the Company shall have and shall
be deemed always to have had, the right to keep the debentures alive for the
purposes of re- issue; and in exercising such a right, the Company shall have,
and shall be deemed always to have had, power to re-issue the debentures either
by re-issuing the same debentures or by issuing other debentures in their
place.
Upon such re-issuance of the
debentures, the person entitled to the same shall have, and shall always be
deemed to have had the same rights and priorities as if the debentures had
never been redeemed.
Where a Company has deposited any
of its debentures to secure advances from time to time on current account or
otherwise, the debentures shall not be deemed to have been redeemed by reason
only of the account of the Company having ceased to be in debit whilst the
debentures remained so deposited. For the purpose of stamp duty, re-issue of
debentures shall be treated as a fresh issue.
Debentures already redeemed can
be reissued only if a Board resolution is passed in that regard. Upon re-issue
of debentures, the date of redemption of debentures does not get extended i.e.
it remains same as per the terms of original issue.
The advantage of keeping
debentures alive is that the preliminaries preceding the issue of the
debentures need not be complied with again and the re-issue can be made without
delay. In that the Company is not required to file documents for satisfaction
of the charge and to file documents for registration of fresh mortgage which
has to be created.
Part I of Schedule VI requires
that the balance sheet of the Company should state the particulars of redeemed
debentures which the Company has power to re-issue.
19. Allowance on renewal of
certain debentures
According to section 55 of the
Indian Stamp Act, when any duly stamped debenture is renewed by the issue of a
new debenture in the same terms, the Collector shall, upon application made
within one month, repay to the person issuing such debenture, the value of the
stamp on the original or on the new debenture, whichever shall be less provided
that the original debenture is produced before the Collector and cancelled by
him in such manner as the State Government may direct.
A debenture shall be deemed to be
renewed in the same terms within the meaning of this section notwithstanding
the following changes:—
(a) the issue of two or more
debentures in place of one original debenture, the total amount secured being
the same;
(b) the issue of one debenture in
place of two or more original debentures, the total amount secured being the
same ;
(c) the substitution of the name
of the holder at the time of renewal for the name of the original holder; and
(d) the alteration of the rate of interest or
the dates of payment thereof.
Article 27 of Schedule I of the
Indian Stamp Act, 1899 exempts debentures secured by registered mortgage from
the payment of stamp duty, hence, there is no re-issue of debentures, provided
they are secured by the same registered mortgage.
20. Right of debentureholders to
obtain copies of and inspection of trust deed
Section 118 gives a debentureholder
right to obtain a copy of the trust deed. The section reads as under:—
A copy of any trust deed for
securing any issue of debentures shall be forwarded to the holder of any such
debentures or any member of the Company, at his request and within seven days
of the making thereof, on payment—
(a) in the case of a printed trust deed, of such
sum as may be prescribed; and
(b) in the case of a trust deed
which has not been printed, of such sum as may be prescribed for every one
hundred words or fractional part thereof required to be copied.
If a copy is refused, or is not
forwarded within the time specified in sub-section (1), the Company, and every
officer of the Company who is in default, shall be punishable for each offence,
with fine which may extend to five hundred rupees and with a further fine which
may extend to two hundred rupees for every day during which the offence
continues.
The Company Law Board may also,
by order, direct that the copy required shall forthwith be sent to the person
requiring it.
The trust deed referred to in
sub-section (1) shall also be open to inspection by any member or
debentureholder of the Company in the same manner, to the same extent, and on
payment of the same fees, as if it were the register of members of the Company.
Right of debentureholders to
obtain copies of annual accounts
Any debentureholder of a Company
shall, on demand, be entitled to be furnished free of cost, with a copy of the
last annual accounts and directors' reports of the Company. [Section 219]
22. Specific performance of
contract to subscribe for debentures
Section 122 provides that a
contract with a Company to take up and pay for any debentures of the Company
may be enforced by a decree for specific performance.
23. Creation of security and stamp
duty
According to Article 27 of
Schedule 1 to the Indian Stamp Act, 1899 debentures issued by an incorporated Company
or other body corporate in terms of a registered mortgage deed, duly stamped in
respect of the full amount of debentures to be issued thereunder, whereby the Company
or body borrowing makes over, in whole or in part, its property to trustees for
the benefit of the debentureholders is exempt from the stamp duty payable on
'debenture'. Where a mortgage is created by a registered mortgage deed, no
further stamp duty will be payable on 'debenture' under Article 27.
As provided in Article 27 of the
Indian Stamp Act, debenture requires impressed stamp and the stamp is payable
on a graduated scale.
24. Liability of debenture
trustees
Section 119 provides that any
provisions contained in a trust deeds securing an issue of debentures, or in
any contract with the holders of debenture secured by a trust deed shall be
void so for as it would have effect of exempting a trustee from liability for breach
of trust, where he fails to show the degree of care and diligence required by
him as trustee. A release from liability can be given only when a majority of
not less
than three-fourth in value of the
debenture holders present in person or by proxy agree at a meeting summoned for
the purpose, and the voting must relate to specific acts or omission or to a
trustee who is dead or has ceased to act. Therefore, a general provision for
exempting trustees from liability should be prohibited but that enabling
clauses as distinct from indemnity clauses, should be permitted.
For a valid release of trustee
from liability not only a majority of three-fourths in value of the
debentureholders should agree but also the release must relate to specific acts
or omission and not be a provision for general release. [Section 119(2)(b)]
25. Registration of charges,
debentures series and stamp duty, etc.
As per section 125(4) of the
Companies Act, 1956, registration inter alia of a charge for the purpose of
securing any issue of debentures is mandatory. Debentures creating a charge on
immovable property must also be registered under Indian Registration Act; a
registration under Companies Act is not enough.
Section 128 of the Companies Act,
1956 stipulates that where a Company issues a series of debentures which is
secured by a charge, the benefit of which will be available to all
debentureholders pari passu, the Company shall file prescribed particulars in
e-Form 10 electronically with the Registrar of Companies for registration of
charge under section 125(4). It is required to submit the following particulars
with the Registrar of Companies:—
(i) The total amount secured by the whole
series.
(ii) The dates of the resolutions
authorising the issue of the series and the date of the covering deed, if any,
by which the security is created or defined.
(iii) A general description of the property
charged; and
(iv) The names of the trustees, if any, for the
debentureholders.
The aforesaid particulars shall
be filed within thirty days after the execution of the deed containing the
charge or, if there is no such deed, after the execution of any debentures of
the series.
Further, with the aforesaid
particulars, there shall be submitted to the Registrar of Companies, the deed containing
the charge, or a copy of the deed verified in the prescribed manner, or if
there is no such deed, one of the debentures of the series.
The following points are
important in these respects:—
(a) any omission to file
prescribed particulars with the concerned Registrar of Companies shall not
affect the validity of the debentures issued by a Company;
(b) debentures may itself contain a charge or
give a reference as to any other instrument in this regard;
(c) the requisite particulars as
stated in (i) to (iv) above are required to be filed in prescribed Form 10
within a period of thirty days after the execution of trust deed containing the
charge, or if there is no such deed, after the execution of any debentures of
the series;
(d) the e-Form 10 shall be filed,
in triplicate and a copy of instrument creating the charge duly verified as per
rule 6, shall be attached thereto alongwith payment of fee;
(e) the e-Form 8 shall be signed both on behalf
the Company as well as the chargeholder;
(f) in respect of debentures
creating a charge on immovable property, a registration under the Companies Act
will not suffice but debentures must also be registered under the Indian
Registration Act.
26. Endorsement of certificate of
registration on debentures, etc.
Section 133 requires that the Company
shall cause a copy of every certificate of registration given under section
132, to be endorsed on every debenture or certificate of debenture stock which
is issued by a Company and the payment of which is secured by the charge so
registered with the Registrar of Companies.
If any person knowingly delivers,
or willfully authorises or permits the delivery of any debenture or certificate
of debenture stock which is required to be endorsed with a copy of a certificate
of registration, as stated above, without being so endorsed upon it, shall be
punishable with fine which may extend to ten thousand rupees.
A debenture holder can sue the Company
for recovery of amounts payable to him as holder of the debenture certificate
because the debenture certificate usually contains a covenant directly between
the Company and the debentureholder that the Company will pay the said amount
and interest thereon to the debentureholder. [Narotamdas Trikamdas Toprani v
Bombay Dyeing & Mfg. Co. Ltd. (1990) 68 Comp Cas 300 (Bom)].
27. Issuance of Share Certificate
Rules not applicable to debentures
The Companies (Issue of Share
Certificate) Rules, 1960 do not apply to debentures nor are there separate
Rules governing issue of debenture certificates. However, the precautions
required under those Rules in respect of share certificate should be observed
in respect of debenture certificates.
It has been held by the CLB, that
section 113(1), as it applies to debentures, casts an obligation on the Company
to deliver the debenture (certificates) within three months of allotment. This
stipulation does not, however, apply to letters of allotment. The legislature
has consciously used the word 'certificate' under the section and the
certificate is statutorily recognised as prima facie evidence. Though a letter
of allotment is also transferable by endorsement and delivery, it has a shorter
span and is not recognised as estoppel against the Company as a certificate is.
The section specifically uses the word 'certificate' only and not 'letter of
allotment'. An interpretation that the term 'debenture certificate' covers
letter of allotment also will result in absurdity and thereby the very purpose
of section 113(1) will be defeated. The main proviso under section 113(1) does
not relate to letters of allotment. As such, the proviso also cannot be
applicable to letters of allotment. One cannot give one interpretation to the
substantive provision and a different interpretation to the proviso to the
substantive provision [Hindustan Development
Corporation Ltd, In re (1994) 79 Comp Cas 207: (1993) 2 Comp LJ 257 (CLB-ERB)]
28. Extension in time for
issuance of debenture certificates
Where a Company is not in a
position to complete creation of security and issue the debenture certificates
within three months of allotment, the Central Government may, on an application
from the Company, grant extension of time upto a further nine months for issue
of the certificates. The debenture certificates will be stamped according to
the stamp duty applicable in the state where the debenture certificates are
issued.
29. Stamp duty need not be paid
if no debenture instrument is issued
In case of Greaves Cotton &
Co. Ltd. v State of Maharashtra (2005) 65 CLA 226 (Bom), it was held that the
State is entitled to impose stamp only on the instrument and not on the
transaction. There is no law, which compels the Company to issue debenture
certificate before converting it into the equity share. There is no mandatory
provision in the Companies Act mandating a Company to issue a debenture
certificate before conversion of the same into an equity share.
Procedure to be followed for roll
over of debentures
All the debentures issued by the Company
shall necessarily be redeemed as per the terms of issue.
If Company finds redemption
difficult, it can roll over non-convertible debentures/non-convertible portion
of convertible debentures, in accordance with SEBI Guidelines. [Refer SEBI
Guidelines for Disclosure and Investors' Protection on a separate section given
in CD with the Book]
For considering the proposal of
roll over of debentures a meeting of the Board of directors shall be convened.
Convene a general meeting of
debenture holders for considering and approving the proposal of roll over of
debentures by way of special resolution.
Obtain a fresh credit rating
within six months preceding the date of redemption and it should be
communicated to all the debenture holders.
Prepare a letter of option for
rollover of debentures.
The letter of option shall be
forwarded to every debenture holder separately.
The Company can roll over
debentures of those debenture holders who have given their positive written
consent for roll over.
Debentures held by those
debenture holders who do not give their positive consent for the roll over
cannot be rolled over.
If the trust deed executed
earlier is not on continuation basis till the redemption, then execute a fresh
trust deed.
The Company shall redeem all
those debentures in respect of which it has not receive positive written
consent for roll over and payment for redemption shall be made within one month
since the date of redemption.
No comments:
Post a Comment