In business, the issuance of debentures is one way of raising money for the company's work. It varies significantly from equity shares or other types of shares (both preference and equity). The fundamental difference is that when one buys the company's shares, he becomes the company's part-owner, but when one buys debentures issued by the company, he becomes a creditor to the company. We may infer that debenture is a type of formal loan issued by another person to the company. The business is obligated to repay the loan with interest within a defined period. The benefit of being a debenture holder is that the debenture holders are deemed to be the creditors in the event of winding-up/bankruptcy and they are the first ones to be re-payed. One of the ways to increase debt funding for a corporation is to issue debentures. A debenture is a known tool used by corporations to show the production of debt, whether or not that debt imposes a tax on the company's assets. As security, under the Companies Act, 2013, debentures can be issued by a private company only via the private placement path. A business can issue debentures with the option, at the time of the share redemption, of converting such debentures into shares, either partially or entirely. However, before this option is granted, the shareholders of the company must, by a special resolution at the general meeting of the company, accept it. The issuance of such debentures does not grant any voting rights to the debenture holder. An individual who is responsible for issuing and distributing debentures is an informal debenture trustee. A debenture trustee is an individual or agency that, for the benefit of another party, acts as the holder of debenture stock. One way to do this when a business is trying to raise capital is by selling stock as a form of debt with the obligation to repay the debt at a particular interest rate. The trustee acts as a representative between the company that issued the debentures and the debenture holders receiving interest payments (the individual who stays in touch with various groups). "Under the 1993 SEBI Rules, "debenture trustee" means a trustee of a trust deed to protect the issue of a corporate entity's debenture [section 2 (bb)]. (Applicable solely to public companies). Eligibility for a debenture trustee: To serve as a debenture trustee, the individual should be either a normal commercial bank, a public financial institution, an insurance company, or a corporate entity. To act as a debenture trustee, the organization should be registered with SEBI.
Rights of a Debenture Trustee: Section 18 (c) says that in no case shall a corporation be able to issue debentures before the appointment of a debenture trustee. Before receiving the approval of the debenture trustee, the firm does not issue debentures. In the offer letter, the company has to state the name of the debenture trustee. The debenture trustee can request the company's periodic performance report. The trustee can call for reports on the use of funds raised by debenture issues. The trustee may promptly communicate the defaults of the debenture holders, if any, with respect to the payment of interest or the redemption of debentures and the action taken by the trustee. The conditions to be met before the trustee appoints the nominee are:
Liabilities of a Debenture Trustee: If he has a shareholding in the business they can’t be appointed as a debenture trustee. If he is a company promoter, employee, or manager, he can not be appointed. No appointment for a company creditor. The debenture vacancy can be filled by the company with the consent of the other trustees.
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