Compliances

What is Issue of Debentures in India

In India, companies can raise funds through issue of Equity shares, Preference shares, and Debentures. In a financial market, Debenture is a medium to long-term debt instrument used by large companies to borrow money at the fixed rate of interest. Debentures are a common type of long-term loans that can be taken by a company. A person holding debentures is called a debenture holder.

It is very different from equity shares or other kinds of shares (both preference and equity). There is a basic distinction being when one buys shares of the company then he becomes the owner of the company, but when one buys debentures issued by the company, he becomes a creditor to the company. We can say that debenture is a kind of a formal loan given to the company by another individual. The company is under obligation to repay the loan within a specified period of time with interest.

Whenever a company, whether it is Public Company or Private Limited Company, wants to raise funds through public, it has to decide about its capital structure i.e. equity and debt structure. Under the equity option, a company issues shares. Shares can be either equity share capital or preference share capital whereas, under debt, there is only one option available with the company, i.e. Debt.

Further, when the company is in expansion mode and looks for funding, then it has to mention in their Business Plan or project report of financing i.e. how much will be owned funds and how much is borrowed from banks and financial institutions. Here, again debt-equity ratio comes into play.

This is the advantage of being a debenture holder. They are considered to be the creditors in case of winding up or bankruptcy of a company and they are the ones who should be repaid first.

Issuance of the debenture is one of the ways of raising debt finance for the company. Debentures can be issued by a private company only through the route of the private placement. A company can issue debentures with an option to convertible into equity shares, either partially or fully, at the time of redemption of the debentures. However, before such an option is given, it must be approved by the shareholders of the company by a special resolution in the general meeting of the company. The issuance of such debentures provides debenture holders with no voting rights.

Debentures are of two kinds

1. Convertible: These are the debentures which can be converted into equity shares on the expiry of specified time.
2. Non- convertible: these are debentures which cannot be converted into equity shares of the company.

In case of issue of secured debentures, the following conditions must be fulfilled:

• Debentures are issued for redemption within maximum up to 10 years. If a company is engaged in infrastructure activity, then it must not be more than 30 years.
• The company shall appoint a debenture trustee before the issue of the prospectus for subscription of its debentures.
• The company has to execute a debenture trust deed to protect the interest of the debenture holders within sixty days from the date of allotment.

The company has to create a DRR account out of profit available to the company for the payment of dividend. Then, such amount shall be credited to such account. The amount lying in the account shall not be utilized by the Close Private Company except for the redemption of debentures.

If a company is issuing secured debentures or making an offer or issuing a prospectus for more than 500 subscriptions of its debentures, it has to appoint one or more debenture trustee as per the Companies (Share Capital and Debentures) Rules, 2014.

Procedure for issue of Debenture

Hold a board meeting to decide the type of debenture to be issued by the company. Pass the following resolutions and prepare & present the draft at the board meeting for the following-

• Approval of Offer letter for private placement in Form No. PAS – 4 and Application Forms
• Approval of Form No. PAS – 5
• Sanction of Debenture Trustee Agreement and appointment of a Debenture Trustee
• Appointment of an expert for approval of an increase of borrowing powers, if required
• To authorize for the creation of charge on the assets of the company
• Agree to the Debenture Subscription Agreement
• To fix day, date and time for the extraordinary general meeting
• At the time of the appointment of SEBI Registration Debenture Trustee, consent shall be obtained from the Trustee, who is considered to be appointed. A Debenture Trust Deed in favor of Debenture Trustees within a period of 60 days of allotment of Debentures.
• Issue the notice of extraordinary general meeting along with the explanatory statement.
• In the extraordinary general meeting, pass the special resolution for issuing convertible secured debentures, increasing the borrowing powers of the company and authorizing the Board to create a charge on the assets of the company.

Certificate of Debenture

The certificate of debenture should be issued within a period of 6 months from the date of allocation of the debenture.

In case you are looking for the services related to the issue of debentures, then we at Enterslice can help you throughout the process. For more details, visit our website www.enterslice.com or mail your queries at info@enterslice.com.