According to section 2(30) of the Companies Act, 2013, debentures consist of bonds, debenture stocks, or any other instruments of a company evidencing a debt, whether constituting a charge on the company’s assets or not provided that;
- The instrument mentioned in chapter III-D of RBI act, 1934 and;
- Such other instruments, as might be noted by the central government in consultation with the RBI, issued by the company, should not be treated as a debenture.
To put it simply, a debenture might be referred to as an instrument acknowledging a debt by a company to some individual(s).
According to section 71 of the companies act, 2013, a company can issue debentures with an option of converting such debentures into shares or opt for private placement of non-convertible debentures either fully or partly at the time of redemption.
Given that the issue of debentures with an option of converting such debentures into shares will be approved by a special resolution passed by the shareholders in a duly convened GM of the company.
Characteristics of debentures.
According to section 23 of the companies act, 2013, the provisions of the companies act concerning the issue of shares to the public by prospectus would also mutatis mutandis apply to the issue of debentures by prospectus.
Types of the debentures.
1. Redeemable debentures.
They will be issued on the terms that a company is bound to repay the amount of debentures, either at the fixed date or on-demand or under a system of periodical drawings or after notice.
Convertible debentures.
In these types of debentures, an option will be given to the debenture holders to exchange a part or full of their debentures for shares in the company under specific conditions and restrictions enforced concerning the period during which the option might be exercised. This allows investors to change the position from the debenture holders to shareholders. When he/she finds the company is in a good position finically and starts to earn profits.
2. Secured and unsecured/necked debentures.
Where the debentures are protected by a mortgage or a change on the company’s property, they are called secured debentures. They are not covered by any mortgage or charge on any property of the company; they can be called naked or unsecured.
Secured debentures might be issued by the company subject to such T&Cs as might be stated by the companies (share capital and debentures) rules, 2014 and amendment thereof.
Also, the company is not allowed to issue any kind of debentures with having any voting rights.
Particular condition for issuance of the secured debenture.
Before issuing the secured debentures by the company, they are obliged to abide by the following conditions, such as;
- Redemption of secured debenture should not go beyond ten years from the date of issue. Given the following classes of companies might issue secured debentures for a period going beyond ten years but not exceeding 30 years.
- Companies are functioning under infrastructure projects.
- Infrastructure finance companies as defined in clause (viii) of sub-direction 1) of direction 2 of NBF (non-banking financial) (non-deposit accepting or holding) companies’ prudential norms (reserve bank) directions, 2017.
- Infrastructure debt fund NBF companies.
- Companies allowed by a ministry or department of the central government or by RBI or by NHB (national housing bank) or by any other statutory authority to issue debentures for a period exceeding a decade.
- Issuance of debentures should be protected by creating a charge on the assets/properties of the company and its subsidiaries/ its associates’ companies/ its holding company, having a value that would suffice to repay the debentures’ amount and interest thereon.
- The company must appoint one or more debenture trustees before issue a prospectus or make an offer or invitation to the public or to its members exceeding the 500 for the subscription of its debentures and implement the trust deed within two months from the allotment of debentures to safeguard the interest debenture holder.
- The company will have to abide by the requirements concerning (DRR) debenture redemption reserve and investment or deposit of sum in respect of debentures maturing during the year ending on the 31st of March of the next year.
Is a private company allowed to list its debenture?
Yes, businesses having company incorporation in India can issue debenture/bonds under the companies act, 2013. There will be limitations concerning maintaining asset cover, credit score rating, hold liquid assets for current maturities, DRR and so forth.
A private company can do private placement and list the same in NSE or BSE under the debt portion after abiding by the SEBI (Listing obligations and disclosure requirements) regulations, 2015.
The process to issue debenture on a private placement basis.
Step one – convey a board meeting and pass resolutions to approve the following;
– To issue debentures and choose its type, whether secured or unsecured T&Cs thereof.
– Provide a letter for private placement in form no PAS-4 and application form/debenture subscription agreement.
– Approving form, no PAS-5 (record of a private placement offer).
– Debenture trustee’s written consent and appointment thereof (in case of secured debenture).
– Approving the debenture trustee agreement. (for secured debentures).
– To get sanction for creation of charge on the company’s assets (for secured debentures).
– To fix the date, day and time for extraordinary GM of shareholders in case of increase in borrowing power of the board of director by passing a special resolution in terms of section 180(1)(c).
– Sanctioning the board of directors to open a separate bank account for the proposed issue according to section 42.
Step two – sending a notice to shareholders for extraordinary GM of the company and that should contain an explanatory statement, specifying the particulars of the offer, date of passing, various offered securities and its price, basis or justification for the price, name and address of valuer who performed valuation, amount that the company intends to raise, material terms of raising like securities, chosen schedule, purpose or objects of the offer, contribution being made by the directors or promotes.
Step three – pass a special resolution in shareholders meetings for private placement of debenture and increase borrowing limit for issuing debenture.
Step four – submitting of E-form MGT-14 along with valuation report, offer letter and CTC of special resolution along with the explanatory statement appended with EGM’s notice.
Step five – send offer letters in the form PAS-4 to identified persons within one month of recording the names of the identified persons, and value of the share would be according to the valuation report of a registered valuer as given under section 247 of companies act, 2013.
Step six – open a separate bank account and receive application money within the offer period according to the office letter.
Step seven – convey board meeting after the closure of the offer period and pass a resolution for following.
– Granting debenture to the entitled subscribers.
– Issuing debenture certificate.
– Creating DRR.
– Creation of charge on an asset if needed.
– Debenture deed (SH-12).
Step eight – submit e-form PAS-3 return of allotment within 15 days from passing board resolution for allocation.
Step nine – issuing share certificate according to section 56(4) to the allottees within six months of allotment.