4.

Issue of Debentures
If a company needs funds for expansion and development purpose without increasing its share capital, it can
borrow from the general public by issuing loan certificates for a fixed period of time and at a fixed rate of interest. Such
a loan certificate is called a debenture. Debentures are offered to the public for subscription in the same way as for issue
of equity shares. Debenture is issued under the common seal of the company acknowledging the receipt of money

The word ‘debenture’ is derived from the Latin word ‘debre’ which means “to owe a debt”. It is a medium- to
long-term debt instrument used by large companies to borrow money, at a fixed rate of interest.

Definitions

1. “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. ____Sec 2 (30) of Companies Act 2013

2. “Debenture is a document given by the company as evidence of debt to holder usually arising out of loan and most
commonly secured by charge.” ______ Tophon

3. “Debenture is an instrument under seal evidencing debt, the essence of it being admission of indebtedness.” _____
Palmar

4. “Debenture is a document which either creates a debt or acknowledges it.” —Justice Whity

5. “A debenture is an instrument issued by the company under its common seal acknowledging a debt and setting
forth the terms under which it is issued and is to be paid.” —Naidu and Datta

From the above definitions it is clear that debenture is one of the capital market instruments which are used to
raise medium or long term funds from public. A debenture is essentially a debt instrument that acknowledges a loan to
the company and is executed under the common seal of the company. It creates charge on assets. It is a source
borrowed capital and Debenture holder considered creditors of the company and he gets interest as a return on
investment. Companies can issue various types of debentures such as secured or unsecured, convertible or non-
convertible, registered or bearer and redeemable.

Company can issue debentures to its members, general public or make private placement. A company can make
public issue of debentures only if:

 The company or its promoters or its Directors have not been prohibited from accessing the capital market by SEBI.
 The company or its promoters or its Directors have not been declared as a willful defaulter or has not in repaying
any principal or interest on any debt securities for a period of more than 6 months.

Regulations Governing Issue of Debentures

 Section 71, Companies Act, 2013: This sections provides provisions regarding issue of all types of Debentures
 Companies (Share Capital and Debentures) Rules 2014, Rule-18: It provides provisions regarding issue of secured
debentures
 SEBI (Issue and Listing of Debt Securities) Regulations, 2008: It provides provisions regarding issue and listing of
non-convertible debentures. It is applicable if debentures are issued by public placement or private placement and
for listed debentures. As per these provisions company has to follow disclosure requirements as applicable to public
issue of equity shares.
1
 SEBI (Issue of Capital and Disclosure Requirement) Regulations, 2009: It provides provisions regarding issue and
listing of convertible debentures, either partially, fully or optionally into listed or unlisted equity shares. As per these
provisions company has to follow disclosure requirements as applicable to public issue of equity shares.
 SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015: It provides provisions regarding listing
of non-convertible, secured debentures on stock exchange.
 RBI Guidelines: These guidelines applicable for Banking Companies for raising capital by issue of non-equity
instruments such debentures or bonds.

Provisions for Issue of Debentures

As per Section 71 of Companies Act, 2013
1. No Voting Rights: A company cannot issue debenture with voting rights. Debenture is a source of borrowed capital
and debenture holders are considered as a creditor of the company, so they do not enjoy any voting rights except in
matters affecting them.
2. Types of Debentures: A company can issue various types of debentures such as secured or unsecured, registered or
bearer, fully or partly or optionally convertible debentures or non-convertible debentures. For issue convertible
debentures, company obtains approval from members by passing special resolution in general meeting (AGM or
EGM). All debentures are redeemable in nature.
3. Payment of Interest and Redemption: A company shall redeem the debentures and pay interest as per the terms
and conditions of their issue. Normally interest pay half-yearly or annually to debenture holders.
4. Debenture Certificate [Sec 56 (4)]: Company has to issue debenture certificate to debenture holder either in the
form of physical or de-mat. Company issue debenture certificate within 6 months from the date of allotment.
5. Debenture Redemption Reserve: Company has to create a Debenture Redemption Reserve account out of profit of
the company available for payment of dividend. This money can be utilized only for redemption of debentures. As
per Companies (Share Capital and Debentures) Amendment Rules 2019, MCA has removed Debenture Redemption
Reserve requirement for Listed Companies, Non-Banking Finance Companies and Housing Finance Companies.
6. Debenture Trustee: A company which issues prospectus or invites more than 500 persons to buy its debentures has
to appoint one or more Debenture Trustees. Debenture trustee is a person who safeguards the interest of
debenture holders and serves as a liaison between the issuer company and the debenture holders. The company
shall appoint a debenture trustee before the issue of prospectus or letter of offer for subscription of its debentures
and not later than 60 days after the allotment of the debentures, execute a debenture trust deed to protect the
interest of the debenture holders.
7. Debenture Trustees can Approach NCLT: Debenture Trustees have to redress the grievances (complaints) of
debenture holders. If the company make default in the payment of interest or repayment of principal amount on
maturity. Debenture Trustees take charge of mortgaged assets and sale them in the market, this money use for
payment. But mortgaged assets not sufficient for payment of debenture that time they can approach to National
Company Law Tribunal. The Tribunal may, after hearing the company and any other person interested in the matter.
NCLT can order a defaulting company to repay the principal amount and interest to debenture. NCLT can order to
restrict incurring further liabilities so as to protect the interest of the debenture holders. (NCLT issue order
defaulting company uses other assets for repayment of debentures before payment of other liabilities.)
8. Penalty: If any default is made in complying with the order of the Tribunal under this section, every officer of the
company who is in default shall be punishable with imprisonment for a term which may extend to three years or
with fine which shall not be less than two lakh rupees but which may extend to five lakh rupees, or with both.
If the company fails to follow any provision of the Companies Act, then the company and its responsible officers
shall be punishable with monetary fine or imprisonment or both as per the Act.

2
Provisions as per Companies (Share Capital and Debentures) Rules, 2014, Rule 18
1. Tenure of Secured Debentures: Debenture is a source of borrowed capital, so it is repay after specific time period.
All secured debentures should be redeemed within 10 years from the date of its issue. Only certain companies such
as infrastructure development companies, Infrastructure Finance Companies, Infrastructure Debt Fund Non-Banking
Financial Companies, Companies permitted by a Ministry of Corporate Affairs or Reserve Bank of India to issue
debentures for a period more than 10 years but less than 30 years.
2. Create Charge on Assets: As per Companies Act 2013, Company only issue secured debentures, so company has to
create on the assets of the company or its subsidiary company or holding company. The value of charge should be
sufficient to the cover the entire value of debentures issued and interest to be paid on it. A company maintains
record of charge in the ‘Register of Charges’. If a Government company issued secured debentures which has Central
or State Government’s guarantee, then it need not create any charge on its assets.
9. Debenture Trustees: The Company shall appoint a debenture trustee before the issue of prospectus or letter of
offer for subscription of its debentures or within 60 days after the allotment of the debentures, execute a debenture
trust deed to protect the interest of the debenture holders. The Deed contains the terms and conditions agreed
upon by the company and the Trustees and clearly states the role of the Debenture Trustee.
3. Debenture Redemption Reserve: The Company shall create a debenture redemption reserve account (DRR) out of
the profits of the company available for payment of dividend. The amount credited to such account shall not be
utilized by the company except for the redemption of debentures. DRR is not required to be created for the
convertible debentures. Company has to maintain DRR at least 25% of the value of its outstanding debentures.
Company has to invest or deposit on or before 30th April each year, at least 15% of the amount of its debentures
maturing during the year ending on 31st day of March of next year.

Requirement as per SEBI for Issue of Debentures

1. Minimum Subscription: SEBI (Issue and Listing of Debt securities) Regulation, 2008 Regulation-12 provides the
minimum subscription to be collected by company. Minimum subscription is the minimum amount of debentures
that must be taken or bought by the subscribers. Minimum subscription amount should be 75% of base issue size. If
the company does not receive minimum subscription of its base issue size (75%), then the entire application money
shall be refunded within 12 days from the date of the closure of the issue and cancel the issue. In case of fails to
refund within period, company will be liable to repay that money with interest 15% p.a. on amount.
2. Retention of Oversubscription: When a company gets huge response from the general public for the public
placement and receives more application for the number of debentures than issue, is known as Oversubscription.
Board of directors has to take decision regarding allotment policy. Company can retain oversubscription money up
to maximum 100% of the base issue or any lower unit specified in the prospectus or letter of offer or offer letter.
3. Underwriting: Company fails to collect minimum subscription within specified time; the entire application money
shall be repaid of 12 days from the closure of issue and cancel the public issue of debentures. To avoid such a
situation, company may enter into an underwriting agreement with the underwriters. Underwriter is a person or
organization gives guarantee to purchase unsold debentures for completing the minimum subscription (75% of base
issue size) criteria for the issue of debentures. Underwriter works on commission basis. Details regarding
underwriters should be disclosed in the prospectus or letter of offer or offer letter.
4. Credit Rating: It is a scientific tool of evaluation of financial instruments of the issuing company. It is a score or grade
that a company or organization gives to a possible borrower and that indicates how likely the borrower is to repay a
loan. Credit rating is an opinion about a debt instrument and its issuer. It tells an investor, whether the debt
instrument is safe or risky. It tells whether the issuer will be able to pay the interest and repay the principal amount
in time. Normally English alphabets are used to indicating rating symbols such as AAA, AA, A, BBB, B, C, D etc. In
India Credit Rating Information Services of India Limited (CRISIL), Investment Information and Credit Rating Agency

3
 (ICRA), Credit Analysis and Research Limited (CARE), Small and Medium Enterprises Rating Agency (SMERA), Fitch
India and Brickwork Ratings these companies are engaged in credit rating.
As per SEBI (Issue of Capital and Disclosure) Regulation, 2018, Companies making a public issue or right issue of
convertible debentures must obtain credit rating from one or more credit rating agencies. This rating must be
disclosed in prospectus or letter of offer or offer letter.

Procedure for Issue of Debentures

1. Board Meeting: In the company Board of Directors have proper authority regarding issue of debentures. Before
issue of debentures company convey the board meeting and pass the various resolutions regarding issue as follows
 Amount , face value, issue value and types of debentures to be issued and the terms and conditions for issue
 Approve the Prospectus or Offer Letter or Letter of Offer
 Call General Meeting (AGM/EGM) of members if the Board’s borrowing powers need to be increased.
 Approve appointment of Debenture Trustees and get their written consent.
 To approve the draft notice of General Meeting along with explanatory statement annexed to the notice as per
requirement of the Section 102 of the Companies Act, 2013.
 Authorize Board to create charge on assets of the company.
 Authorizes Board to open a separate bank account for receiving money from applicants.
The Board of directors also authorizes secretary to satisfy statutory and general conditions regarding issue and
allotment of debentures. Listed Companies shall give prior intimation to the stock exchange about the meeting of
the Board of Directors in which the proposal for issue of debentures through Private Placement is due to be
considered at least 2 working days in advance, excluding the date of intimation and date of meeting.
Company shall file copy of Board Resolution to ROC in Form MGT-14 within 30 days of passing of resolution in
Board Meeting.
2. Approved by Member: As per the Articles board of directors raise borrowed capital up to owned capital. If by the
issue of Debentures Company’s borrowed capital increased more than owned capital that time requires to obtain
approval from the shareholders and increase the borrowing powers of the board. So company arrange general
meeting (AGM/EGM) of the equity shareholders and pass special resolution for increase the borrowing powers of
the board of directors.
3. Filing to ROC: Secretary has to submit copy special resolution of general meeting with form MGT-14 to Registrar of
Companies within 30 days from passing. Company also submits copy of prospectus, offer letter/letter of offer to
ROC, SEBI and listed stock exchange.
4. Obtain Credit Rating: For the issue of debentures Company requires to obtain credit rating from one or more rating
agencies. The ratings must be mentioned in the prospectus/offer letter/Letter of offer.
5. Enter into Underwriting Agreement: For satisfying minimum subscription (75% of base issue size) criteria, company
make agreement with underwriter for its debenture issue. This underwriting agreement must be mentioned in the
prospectus/offer letter/Letter of offer.
6. Issue of Prospectus/ Offer Letter/Letter of Offer: After completing all statutory and general provisions, company
make provision for sale of prospectus/offer letter/Letter of offer.
Prospectus Public Placement – invite the general public
Offer Letter Private placement – invite the specific persons
Letter of Offer Right Issue – invite the existing equity shareholders
7. Open Separate Bank Account: Company opens a separate bank account in a scheduled Bank to receive the
application money. This money cannot be used by company up to allotment of debentures.

4
8. Receiving Application Money: Interested people purchase the prospectus from the brokers and merchant bankers,
fill up the debenture application form and submit it to company’s bankers with application money within the
specified time period mentioned in the prospectus/offer letter/Letter of offer.
9. Board Meeting: After closing the issues, the banker transfers all application forms to the company. Secretary verifies
them and only correct & complete applications are selected for allotment of debentures. Company arranges the
board meeting for allotment of debentures. Directors use their power by passing board resolution to allot
debentures. Board also approves creation of charges on company assets. In case of under subscription all applicant
get debentures and remaining purchase by underwriter. But in case over subscription company use proper
allotment policy for allotment of debentures. After meeting, secretary makes proper communication with debenture
applicants. He sends allotment letter or regret letter.
10. Make Entries in the Register of Debenture: The allotment procedure has to be completed within 60 days from the
receipt of application money. Secretary has to make entries in the Register of Debenture holders in Form MGT-2
within 7 days after the Board approval of allotment. If debentures issued in de-mat form, company does not
maintain the Register of Debentures holders, because their record maintain by Depository (NSDL/CDSL). Secretary
also makes entries in the Register of Charges. Company also prepare Return of Allotment and submit to ROC within
specific time (in case of private placement within 15 days from board resolution).
11. Issue of Debenture Certificate: After the allotment of debentures, company must prepare and issue the debenture
certificate to debenture holders. This certificate either in physical format or De-mat/electronic/digital. Company has
to issue Debenture certificate within 6 months of allotment of debentures.

Debenture Trustees
 A company which issues prospectus or invites more than 500 persons to buy its debentures has to appoint
Debenture Trustees. Companies issuing secured debentures also must appoint Debenture trustees.
 Debenture trustee is a person or institutions which protect the interest of debenture holders and serves as a liaison
between the issuer company and the debenture holders.
 Debenture Trustee plays a very important role in the Non-Convertible Debentures issue by safeguarding the interest
of debenture holders and acting as an intermediary between the issuer company and the debenture holders.
 The company creates a charge on its movable or immovable assets or assets of its subsidiary company or holding
company. Charge is created in favour of the Debenture Trustees. The Trustees become the custodian of the assets
on which charge has been created.
 The company shall appoint a debenture trustee before the issue of prospectus or letter of offer for subscription of
its debentures and not later than 60 days after the allotment of the debentures. They must give a written consent
to act as Debenture Trustees.
 A debenture trustee is required to assist the issuer company to oversee the end- to- end NCD issue process from
offer letter till settlement of debts. The concept of debenture trustee came into existence due to the difficulties
faced by the issuer company to single-handedly deal with each debenture holder for various matters leading to
inefficiency in the NCD issue process and an increase in defaults. Hence was felt the need for a single point of
contact who can act as a link between the issuer company and debenture holder for the smooth functioning of the
process and protecting the interest of the debenture holders.
 Debenture Trustees have to solve the grievances (complaints) of debenture holders. If the company make default in
the payment of interest or repayment of principal amount on maturity. Debenture Trustees take charge of
mortgaged assets and sale them in the market, this money use for payment. But mortgaged assets not sufficient for
payment of debenture that time they can approach to National Company Law Tribunal.

5
Debenture Trustee Appointment / Eligibility Criteria
To act as a debenture trustee, the entity should either be:
 A scheduled bank carrying on commercial activity; or
 A public financial institution; or
 An insurance company; or
 A body corporate.
The entity should be registered with SEBI to act as a debenture trustee.
The entity should be an independent body from the issuer company and should in no way be related to the company.
The principal officer overseeing the activities of the debenture trustee should NOT be:
 A beneficial share owner of the issuer company, or
 A promoter, director or key management personnel or employee of the issuer company or its holding, subsidiary
or associate company.

Debenture Trust Deed

 Company enters into a contract with one or more Debenture Trustees. The terms and conditions of the agreement
are written in the Debenture Trust Deed. It is a legal instrument conveying the assets of a company to the Trustees.
 A Debenture Trust Deed is a document created by a company as security that is issued by the company to protect
the interest of a denture holder, where trustees are appointed.
 Debenture Trust deed is a written instrument legally conveying property to a trustee often for the purpose of
securing a loan or mortgage. It is the document creating and setting out the terms of a trust.
 The Deed will usually contain the names of the trustees, the identity of the beneficiaries and the nature of the trust
property, as well as the powers and duties of the trustees. It also explains the rights of debenture holders.
 Company has to execute the Deed within 3 months of closure of the issue.
 Members as well as Debenture holders can inspect and also get a copy of it by paying a certain fees. A copy of the
trust deed shall be forwarded to any member or debenture holder of the company, at his request, within seven days
of the making thereof, on payment of fee.