Tuesday, February 9, 2016



1.     The issues of Debentures are governed by Section 71 of Companies Act 2013 read with Rule 18 of Companies Share Capital and Debentures Rules, 2014.

2.   Definition as per Section 2(30) Companies Act,2013 ” debenture” includes debenture stock, bonds and any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.

3.     Pursuant to Companies (Acceptance of Deposits) Rules, 2014, “Deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include:

(ix) any amount raised by the issue of bonds or debentures secured by a first charge or a charge          ranking pari passu with the first charge on any assets referred in schedule III of the act (excluding intangible assets of the company) or bonds or debentures compulsorily convertible into shares of the company within 5 years.
         Therefore as per deposit rules for exemption from deposit:
·        Debentures must be adequately charged as per deposit rule. If Optionally Convertible Debentures issued as per Sec 71 (1) and fully secured with first charge on assets of equivalent amount of OCD is not a deposit.
·        If not charged, it must be compulsorily convertible within 5 years.

4.     Rule 18(1)(d) of Companies Share Capital and Debentures Rules, 2014 provides, the security for the debentures by way of a charge or mortgage shall be created in favor of the debenture trustee on-

(i)                any specific movable property of the company (not being in the nature of pledge); or

(ii)              any specific immovable property wherever situate, or any interest therein

The term specific used in the above sub-clauses states that the charge shall be created on specific property. As per my understanding the Company cannot create floating charge, it has to be fixed. The only option left is to issue debentures compulsorily convertible into share.


The issue of Compulsory Convertible Debentures shall be governed by Section 42, 71 & 62 of Companies Act 2013.
·        Pursuant to provision of Section 42, 62(3) and 71, Compulsory Convertible Debentures  shall be approved by a special resolution passed at a general meeting

·        As per rule 18 of Companies Share Capital and Debentures Rules, 2014, No Debenture Redemption Reserve is required in case of Compulsory Convertible Debentures.

·        If we are issuing compulsory convertible debentures, we need not to execute debenture trust deed as we are not securing anything.


The company shall not issue secured debentures, unless it complies with the following conditions, namely:-
1. Term of Debentures:
 An issue of secured debentures may be made, provided the date of its redemption shall not exceed 10 years from the date of issue.

If a company engaged in the setting up of infrastructure projects may issue secured debentures for a period exceeding 10 years but not exceeding 30 years.
2. Secured by charge:
 An issue of debentures shall be secured by the creation of a charge, on the properties or assets of the company, having a value which is sufficient for the due repayment of the amount of debentures and interest thereon.
3. Appoint Debenture Trustee:
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.
5. Charge/Mortgage in favour of Debenture Trustee:
The security for the debentures by way of a charge or mortgage shall be created in favour of the debenture trustee on-

(i) Any specific movable property of the company (not being in the nature of pledge); or

(ii) Any specific immovable property wherever situate, or any interest therein.

Conditions for appointment of Debenture Trustees
No company shall issue a prospectus or make an offer or invitation to the public or to its members exceeding 500 for the subscription of its debentures, unless the company has, before such issue or offer, appointed one or more debenture trustees.
 The company shall appoint debenture trustees after complying with the following conditions, namely:-
(a) the names of the debenture trustees shall be stated in letter of offer inviting subscription for debentures and also in all the subsequent notices or other communications sent to the debenture holders;

(b) Before the appointment of debenture trustee or trustees, a written consent shall be obtained from such debenture trustee or trustees proposed to be appointed and a statement to that effect shall appear in the letter of offer issued for inviting the subscription of the debentures;
(c) A person shall not be appointed as a debenture trustee, if he-

(i) Beneficially holds shares in the company;

(ii) is a promoter, director or KMP or any other officer or an employee of the company or its holding, subsidiary or associate company;

(iii) is beneficially entitled to moneys which are to be paid by the company otherwise than as remuneration payable to the debenture trustee;

(iv) is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company;

(v) Has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon;

(vi) has any pecuniary relationship with the company amounting to 2% or more of its gross turnover or total income or Rs.50 Lakhs or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;

(vii) is relative of any promoter or any person who is in the employment of the company as a director or KMP.

(d) The Board may fill any casual vacancy in the office of the trustee but while any such vacancy continues, the remaining trustee or trustees, if any, may act. If such vacancy is caused by the resignation of the debenture trustee, the vacancy shall only be filled with the written consent of the majority of the debenture holders.

(e) Any debenture trustee may be removed from office before the expiry of his term only if it is approved by the holders of not less 3/4th in value of the debentures outstanding, at their meeting.
Creation of Debenture Redemption Reserve A/c:
The company shall create a Debenture Redemption Reserve for the purpose of redemption of debentures, in accordance with the conditions given below;

(a) The Debenture Redemption Reserve shall be created out of the profits of the company available for payment of dividend;

(b) The company shall create Debenture Redemption Reserve equivalent to at least 50% of the amount raised through the debenture issue before debenture redemption commences

(c) every company required to create Debenture Redemption Reserve shall on or before the 30th day of April in each year, invest or deposit, as the case may be, a sum which shall not be less than 15%, of the amount of its debentures maturing during the year ending on the 31st day of March of the next year, in any one or more of the following methods, namely:-

(i) In deposits with any scheduled bank, free from any charge or lien;

(ii) In unencumbered securities of the CG or of any SG;

(iii) In unencumbered securities mentioned in sub-clauses (a) to (d) and (ee) of section 20 of the Indian Trusts Act, 1882;

(iv) In unencumbered bonds issued by any other company which is notified under sub-clause (f) of section 20 of the Indian Trusts Act, 1882;

(v) The amount invested or deposited as above shall not be used for any purpose other than for redemption of debentures maturing during the year referred above:

 The amount remaining invested or deposited, as the case may be, shall not at any time fall below 15% of the amount of the debentures maturing during the year ending on the 31st day of March of that year.

(d) In case of partly convertible debentures, Debenture Redemption Reserve shall be created in respect of non-convertible portion of debenture issue in accordance with this sub-rule.

(e) The amount credited to the Debenture Redemption Reserve shall not be utilized by the company except for the purpose of redemption of debentures.
Contract enforce by Decree:
A contract with the company to take up and pay for any debentures of the company may be enforced by a decree for specific performance.

Redemption of Debentures:

 A company shall pay interest and redeem the debentures in accordance with the terms and conditions of their issue.
Debenture Trustee file petition before Tribunal:

 The debenture trustee may file a petition before the Tribunal-

If 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.
Order by Tribunal:
The Tribunal may, after hearing the company and any other person interested in the matter, by order, impose such restrictions on the incurring of any further liabilities by the company as the Tribunal may consider necessary in the interests of the debenture-holders.

The Tribunal may, on the application of any or all of the debenture-holders, or debenture trustee and, after hearing the parties concerned, direct, by order, the company to redeem the debentures forthwith on payment of principal and interest due thereon, If a company fails to redeem the debentures on the date of their maturity or fails to pay interest on the debentures when it is due.
Inspection of Trust Deed:

A trust deed for securing any issue of debentures shall be open for inspection to any member or debenture holder of the company, in the same manner, to the same extent and on the payment of the same fees, as if it were the register of members of the company.
Copies of Trust Deed
 A copy of the trust deed shall be forwarded to any member or debenture holder of the company, at his request, within 7 days of the making thereof, on payment of fee



Call Meeting of Board Director:

  • Issue Notice of Board Meeting to all the directors of company at least 7 days before the date of Board Meeting.

Hold the Board Meeting:

  • Identify the person to whom you will issue debentures.
  • Prepare list of such persons.
  • Prepare Draft offer letter under PAS-4.
  • Pass Board Resolution for approval of offer letter.
  • Issue Notice of General Meeting. (As per Section- 101(1) issue notice of General Meeting at least 21 days before General meeting).

Hold Extra Ordinary general Meeting:

  • Present Offer Letter in PAS-4 before the members of the meeting.
  • Pass Special Resolution for Private Placement of Debentures. [For every such offer separate Special Resolution is required].

Circulate Letter of Offer in form PAS-4:

  • Offer letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made.
  • Issue offer letter within 30 days of General Meeting/recording the name of such person.


File Form with Registrar:

  • File MGT-14 with Registrar within 30 days of passing of Special Resolution.

  • Notice of General Meeting along with Explanatory Statement.
  • Certified True copy of Special Resolution.
  • Minutes of General Meeting

Open Separate Bank Account:

  • The payment to be made for subscription to securities shall be made from the bank account of the person subscribing to such securities.
  • The company shall keep the record of the Bank Account from where such payment for subscription has been received.

File Form with Registrar:

  • File GNL-2 with Registrar within 30 days of circulation of offer letter

  • PAS-4 (Offer Letter).
  • PAS-5 (Complete record of Private Placement).


Call Board Meeting after receiving of application money.

  • Issue Notice of Board Meeting to all the directors of company at least 7 days before the date of Board Meeting. [Section-173(3)]

Hold the Board Meeting:

  • Present List of Allottes before the Meeting.
  • Pass Board Resolution for allotment (within 60 days of receiving of money).
  • Pass Resolution for issue of Certificate in same Meeting.
  • Authorize to two directors and a authorize person to sign certificate.
File form with ROC:

  • File PAS-3 with Registrar of Company.
  • List of Allottes.
  • Board Resolution for allotment
·        After the expiry of period for which convertible debentures were issue, the Company will hold the Board Meeting to pass board resolution for conversion of debentures into shares

·        File PAS-3 with Registrar of Company.

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