Meaning of Debentures
Debenture means a document that acknowledges debt. It is a type of borrowing that may be secured or unsecured. Debenture holders get interest as return on investment and the company is liable to pay it irrespective of profit available. Debentures have a predetermined maturity period and do not have any voting right unless any matter is affecting their rights directly.
Types of Debentures
Following are the types of Debentures
Redeemable Debentures means debentures which will be redeemed at the end of its maturity period. Irredeemable Debenture will not be redeemed till winding up of the company. In India, Companies are not allowed to issue Irredeemable Debentures as per companies act 2013.
Registered Debentures means the name of the holder will be mentioned in the debenture certificate and only that person will be considered as owner of the debentures mentioned in the certificate. In case of Bearer Debentures, no name will be mentioned in the certificate and the holder of the certificate will be considered as the owner of those debentures.
Secured Debentures are debentures for which charge is created on the property of the company covering the principal and interest of debentures and for unsecured debentures no charge is created.
Convertible Debentures means debentures for which equity shares will be issued at the time of its maturity and for non convertible debentures cash will be paid at maturity.
Issue of Debentures
To issue debentures, it must be authorised by Memorandum of Association. Pass Board Resolution to authorise the issue and to call a general meeting of the members to pass a Special Resolution. After passing the Special Resolution file it with the Registrar of Companies (ROC) within 30 days in form MGT-14. Debentures can be issued at discount and there is no minimum and maximum limit of rate of interest but in case of unsecured debentures interest rate cannot be higher than interest rate prescribed by Reserve Bank of India for Non Banking Financial Institution. Even zero debentures with zero rate of interest can be issued. Any discount allowed on issue must be stated in the Balance Sheet until fully written off. Debenture Certificate must be issued within 6 months from date of allotment. In case of a Listed Company issuing debentures to public, it should list it on the recognised stock exchange.
Redemption of Debentures
The unlisted company who is not Bank, NBFC or Housing Finance Company is required to create a debenture redemption reserve in which it has to deposit 10% of outstanding deposit out of free reserves. And all companies must maintain Debentures Redemption Investment Account in which 15% of outstanding debentures must be deposited in scheduled commercial banks or invested in unencumbered government securities or securities covered under trust act 1882.
A Listed company may extend the maturity of debentures by passing special resolution of debentureholders and forwarding letter of option to each debenture holder. Debentureholder who do not consent should be paid immediately.
Debenture Trustee
In case a company is issuing secured debentures by prospectus or giving invitation to more than 500 persons, it must appoint a debenture trustee who will act as watchdog for debenture holders. Debenture trustee must be appointed before issue of prospectus and debenture trust deed should be executed within 60 days of allotment of debentures.
Eligibility of Debenture Trustee
- Debenture trustee must not be shareholder of company
- Shall not be promoter, director, employee of the company, its holding company, its subsidiary company or holding company
- Shall not have pecuniary relation of more than 2% of turnover of company or ₹50 lakhs whichever is lower
- Shall not be indebted to company or has given guarantee for other person for amount as may be prescribed
Duties of Debenture Trustee
- Ensure safeguard of property secured
- Solve problems between any debenture holder and company
- Check performance of company periodically
- Ensure lawful utilisation of funds raised by issue of debentures
- Ensure timely payment of interest and principal
- Call meeting of debenture holders whenever required
- Appoint Nominee Director whenever required
- Inform Debenture holders whenever their interest is prejudicially affected
Debenture Trustee can be removed by approval of 75% debenture holders in value. Casual vacancy can be filled by passing board resolution if it is due to reasons other than resignation. By approval of debenture holders if vacancy was due to resignation.
Meeting of debenture holders can be called by debenture trustee suo moto or by application given by at least 10% of debenture holders in value.
Debenture Trust Deed can be inspected by any member of the company or Debenture holder during business hours for 2 hours and can get copy within 7 days of application and on payment of fees. Companies should also maintain a register of debenture holders.
Debenture Trustee will not be held liable unless he is not doing any breach of trust or if debenture holder holding ¾ in value agrees not to take action against him.
Also read Issue and Redemption of Preference, Equity & Sweat Equity Shares