Procedure of Issue of Convertible Debentures by public company within borrowing limits and exceeding borrowing limit

Meaning Of Debenture

Section 2(30) of the Companies Act, 2013 defines “debenture” to include 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.

Provided that the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934 shall not be included in the ambit of the term.

Debenture can be construed as a loan owed by the company to the subscribers of the instrument, bearing a fixed rate of interest and not carrying any voting right in the company.

Issue Of Debenture By Public Company

A Public Company may issue Debentures to raise funds by either Private Placement or a public issue by inviting the general public to subscribe to its debentures.

A debenture may be preferred over other sources of raising funds as:

• It does not lead to dilution of the owner’s stake in the company as debentures do not carry voting right.
• The interest paid is tax-deductible, i.e., interest paid is treated as expenditure and deducted from profit before tax, unlike equity shares.

Debentures may be classified into various categories. For example, Debentures may be classified on the Basis of Convertibility as follows:

A company oversee issue of Convertible debentures or securities by following the provisions of the Companies Act, 2013, and the rules made thereunder, namely Companies (Share Capital and Debentures) Rules, 2014.

Limits Specified Under The Companies Act, 2013

Section 180 of the Companies Act, 2013 imposes a restriction on the power of the Board of Directors.

Section 180(1) (c) specifies that to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed the aggregate of its 

• paid-up share capital
• free reserves 
•  securities premium

The company shall be liable to take shareholders’ approval in a general meeting by way of a special resolution.

For the purpose of the above-specified limit, temporary loans obtained from the company’s bankers in the ordinary course of business shall not be included.

The ambit of the term ‘Temporary loans’ is restricted to loans repayable:

• on-demand ‘or.’
• within six months from the date of the loan; example :
  • short-term, cash credit arrangements
  •  the discounting of bills
  • other short-term loans of a seasonal character
  • But does not include loans raised for the purpose of financial expenditure of a capital nature.

Procedure To Be Followed For Issue Of Convertible Debentures

Section 179 (3)(d) of the Companies Act empowers the Board of Directors to borrow monies, after passing a resolution at the board meeting (In case of section 8 companies, such resolution shall be passed by circulation and not at the meeting of the directors), i.e., if the company resolves to borrow monies within limits specified in section 180(1)(c), it may borrow such amount, without calling a general meeting of the shareholders. In such a scenario, a Board Resolution passed at the meeting of the Board of Directors is sufficient.

In case the company intends to borrow monies which exceed the limit specified under section 180(1)(c), a special resolution in the meeting of shareholders is to be obtained for the purpose of granting permission to the Board of Directors of the Company to borrow monies up to a specific limit. This is also known as blanket resolution since it sets the upper limit for the amount which may be borrowed by the Board without the need to call for a general meeting next time they intend to borrow money on behalf of the company.

The procedure to be followed for issue of convertible debentures is as follows:

•  Call Meeting of the Board of Directors to decide on the following matters:
  1. Kind of the debentures to be issued.
  2.  Fix date, time and venue of the General Meeting of shareholders.
  3. Approve and authorise a person(s) to issue Notice of the General Meeting.
  4. In case of issue by Private Placement
     • Approval of offer letter in form PAS 4.
     • Approval of form of a record of private placement in PAS 5.

• Approval of the Debenture Subscription Agreement.
• In case of secured debentures, following additional approvals shall also be required to be taken:
  • Consent of Debenture Trustee to act as a debenture trustee.
  • Approval of Terms and conditions for appointment of Debenture Trustee and agreement thereof.
  • Authorise creation of charge to secure debentures.

• Dispatch Notice of General Meeting to the members of the company. The Notice period should be of at least 21 clear days in accordance with Section 101(1) of the Companies Act and Secretarial Standard -2.

• Convene General Meeting of Shareholders for approval of the issue of Convertible Debentures.
  • In case, the money to be borrowed, together with the money already borrowed, exceeds the limits specified under section 180(1)(c), approval to increase the said limit shall also be taken.

• Dispatch Letter of Offer and Opening of Bank account to receive subscription money from investors to the debenture issue.

• Forms  to be submitted with the Registrar Of Companies:
  1. PAS 4 And PAS 5 to be submitted by attaching it to GNL 2
  2. CHG 9 for creation of charge in case of issue of secured debentures.

• The company will receive the allotment money along with the application in format given with the offer letter.

• Convene and hold a Board meeting to consider and approve the following items:
  • Allotment of debentures on the basis of applications received.
  • In case of secured debentures, the following additional points are to be approved:
    • The board shall appoint the debenture trustee before the issue of Letter Of offer and execute a debenture trust deed not later than sixty days after the allotment of the debentures.
    • Approval of draft agreement for Charge creation & authorizing the director for signing the same.
    • Approval of the draft of Debenture Trust Deed in SH–12 to be created in favour of the Debenture Trustee. 

• The Board shall make allotment of debentures issued to the applicants and file return of allotment with the Registrar of Companies, in PAS-3.

• Debenture certificates are issued to the allottees within the maximum time frame of 6 months from the date of allotment of the said debentures.

Conditions To Be Kept In Mind While Issuing Debentures

• A company cannot issue debentures with voting rights.
• A company shall not issue an offer letter to the public exceeding five hundred for the subscription of its debentures unless the company has appointed a debenture trustee.
• A company may issue debentures for a period not exceeding 10 years from the date of issue.
• In the case of infrastructure companies, the maximum period for which the debentures may be issued is 30 years from the date of issue.
• In case of secured debentures, the charge to be created on the assets of the company shall be made in favour of the debenture trustee.
• In case of redemption of debentures, the company shall create a debenture redemption reserve account out of the profits of the company available for payment of dividends.

However, such reserve is not mandatory if the debentures are fully convertible into equity shares of the company.

If the debentures are partly convertible, the reserve has to be created for the non-convertible portion of debentures only.

Penalties And Punishments

• Where a company :
  • fails to redeem or convert the debentures on the date of their maturity or
  • fails to pay interest on the debentures when it is due
• The Tribunal may, on the application of:
  • any or all of the debenture-holders, or
  • debenture trustee

Direct, the company to redeem the debentures forthwith on payment of principal and interest due thereon.

• If any default is made in complying with the order of the Tribunal, 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.

Applicability Of Chapter V Of The Companies Act And Companies (Acceptance Of Deposits) Rules, 2014 

A debenture may be sometimes be classified as a deposit if it meets the criteria specified under The Act and the Rules made thereunder. It can be classified as:

As we see above, in case the company issues unsecured debentures, which are not convertible within 10 years of the date of issue, it has to comply with additional compliances pertaining to deposits.

Conclusion

With a wide array of specifications in this form of security and municipality of laws governing companies, apt selection of procedures and adequate compliance of such laws becomes a crucial task, not only for the company’s reputation but also for saving the companies and the officers in default from hefty penalties and punishments.