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Debentures

Courtesy/By: Prathamesh R. Gothe | 2021-02-26 21:29     Views : 90

A company that is authorized to raise capital from the public, may do so either through the issue of shares or by issuing debentures or both, against the funds received from the investors. While those persons in possession of the company’s shares are considered to be the owners of the company, the ones owning the debentures are said to be the creditors of such a company. The shareholders are entitled to the power of voting in the company’s meetings and dividends based on the amount of their shareholding whereas the debenture holders are entitled to receive interest in return on the capital invested by them. Thus it can be said that a company issuing debentures is taking debt or loan from the debenture holders and so is liable to pay them interest at timely intervals along with the principal amount.

Shares may be basically of two types - equity or preference however, debentures are of different types, some of them being convertible, non-convertible, secured, unsecured debentures, etc.

From here on, we shall learn about the laws concerning the debentures of a company as given under the Companies Act of 2013.

1) A company is authorized to issue such kind of debentures which can be converted into shares at a later date either fully or partially on the date of redemption.

2) No debentures issued by a company shall carry any voting rights.

3) A company may issue secured debentures with a redemption period of not more than 10 years. In contrast, companies engaged in the business of infrastructure financing may issue secured debentures having a redemption period beyond 10 years but not exceeding 30 years.

Secured debentures shall be issued by creating a charge on the assets of the company. Such assets shall be sufficient enough in value for redeeming the debentures on the expiry of their term.

A company issuing secured debentures shall appoint a debenture trustee before issuing the prospectus or offer letter inviting the subscription of such debentures and execute a debenture trust deed within 60 days of allotment of such debentures. All the other conditions laid down under prescribed rules shall be complied with by the company raising capital through the issue of debentures.   

4) A company shall also create a Debenture Redemption Reserve (DRR) out of the company’s profits available for distribution of dividends. The amount to the credit of such reserve shall not be utilized for any other purpose than for redemption of debentures.

5) A company that issues debentures to more than 500 persons shall not issue any prospectus or offer letter relating to such issue unless it has appointed a debenture trustee.

The conditions relating to the appointment of a debenture trustee shall be as prescribed by law.

6) A debenture trustee shall endeavor to protect the interests of debenture holders and redressal of their grievances as per the rules prescribed under the company law.

7) If the debenture trust deed includes any such provision which protects the debenture trustee in spite of the lack of care and due diligence in his duties which he is expected to duly perform, then such a provision shall be void.

However, the debenture trustee shall be exempted from his liability if the majority of debenture holders holding at least 3/4th of the total value of debentures issued, agree to grant such exemption.

8) A company shall pay interest on the debentures and redeem the same as per the terms and conditions of the issue of debentures.

9) Where the debenture trustee is of the opinion that the assets are not sufficient enough to pay the principal amount of debentures when due, he may file a petition in respect of the same before the National Company Law Tribunal (NCLT).

The NCLT may impose restrictions on the company from incurring any further liabilities after giving hearing the company and any other person interested in the matter.

10) If a company fails to make the payment of interest and to redeem the debentures once due, all or any of the debenture holders or the debenture trustee shall make an application to the NCLT.

The Tribunal may through an order, direct the company to immediately honor the payment of such principal and the amount of interest which is due.

 

In case of a company being wound up, the debenture holders’ claims shall have a priority for repayment over the claims of preference and equity shareholders. As the amount received against the debenture issued is to be treated as a loan, the company shall act responsibly and utilize the funds in a prudent manner along with making the necessary payments in return to the debenture holders as and when due.

 

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Legal and Tax shall not be responsible for any errors caused due to human error or otherwise. 

Courtesy/By: Prathamesh R. Gothe | 2021-02-26 21:29

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