COMPANY LAW

PROJECT

PROJECT TOPIC- DEBENTURE

Submitted to: Submitted By:

Prof. Rajinder kaur Aakanksha

1/15

Sec-A
 ACKNOWLEDEGEMENT

I Aakanksha hereby like to express my deepest gratitude to my Prof. Rajinder Kaur for

giving me this opportunity to work upon this project and also for her guidance . Also I
am thankful towards my friends who helped me in doing this project.
 CONTENTS

 INTRODUCTION TO CONCEPT OF DEBENTURES

 DEBENTURE FROM LEGAL ASPECTS
 CHARACTERISTICS OF DEBENTURES
 ISSUE OF DEBENTURES
 KINDS OF DEBENTURE
 DEBENTURE TRUST DEED
 CONCLUSION
 BIBLIOGRAPHY
INTRODUCTION TO CONCEPT OF DEBENTURES

In every corporate organization, enormous or not, engaged in doing business or

involved in manufacturing activity or industry providing services, there is always
requirement of finances and funds. In order to run a business effectively and
successfully, adequate amount of capital is necessary. In some cases it is capital is
arranged through internal resources i.e. by way of issuing equity share capital or using
accumulated profit . Equity funds are raised by taking money from the shareholders by
way of their initial contribution in fixed income securities such as treasury bills and
bonds. The share holders are the owners of the company. Equity funds most of the
times is not adequate and the organization is resorted to external resources for
arranging capital i.e. External Commercial Borrowing(ECB), Debentures, Bank Loan,
Public Fixed Deposits etc. There is a provision of powers to borrow for the company in
the memorandum of association of a company. The loans are raised by the corporate
sector by the way of issuance of debentures. As the funds raised by the issue of shares
are are not adequate to meet the financial demand of the company for long run. Hence,
the companies choose to raise long- term funds through debentures.

A Debenture is basically some of the loan amount the company was interested to raise
from the public , that is why it issues debentures. A person who has bought a debenture
and holding it is called a debenture holder. A debenture holder is the creditor of the
company. Under the seal of the company . Debenture is document issued under the
seal of the company. Debenture is an acknowledgment of the funds received by the
company equal to the nominal value of the debenture. It includes the payment of
interest at a fixed rate till the times the principal sum becomes repayable. There may or
may not be a charge put on the sets of the company as security. The date of
redemption along with the rate and mode of payment of interest are mentioned in it. The
last few years has seen the capital market of India to evolve at a much faster rate, the
reasons are launch of new instruments and the modifications in the old technology.

In the present situation debentures prove to be a great contributor to support the

financial needs of the corporate sector. The issue of debentures is a means significant
for raising capital from the market as contrasted with the other modes like , preference
shares, bonus as shares, equity shares, rights issues. The provisions of the Companies
Act identifying with plan additionally apply to debentures where they are issued to the
general population.

The Companies act does not provide for a exhaustive definition of debentures but an
inclusive definition. As per the definition of debenture[1]given in Section 2(30) of the
Companies Act 2013 "Debenture includes debenture stocks, bonds or any other
instruments of a Company evidencing a debt, whether constituting a charge on
the assets of the Company or not". This sections proves that the company has right
to issue bonds or debenture which are instruments as an debt, which can be both
secured or unsecured by the way of creating charge on the way of creating charge on
the assets of the company. A company may issue debentures as a type of long-term
unsecured bond on agreeing to repay it at a predetermined future date. The company
usually pays interest to the debenture holders at the end of every year till the time of
maturity , but if it is not able to pay either the interest or the principal amount of the loan
the creditors of the company has right to ask company into liquidation to recover their
money by the way of selling the assets of the company.
DEBENTURE FROM LEGAL ASPECTS

Companies generally raise funds by issuing as share capital or through borrowing from
lenders. A debenture is one of ways of company borrowing where the company agrees
to repay the debt where may also be a charge over the company’s assets to ensure the
repayment of this debt. Debenture is an alternative form of investment in a company
that is more secured than investment in shares because company must pay interest and
it will be paid before the dividend payment. Debenture holders also get privilege, if the
company which issued the debentures becomes bankrupt. A disadvantage is that
debenture holders have no share in the company and therefore have no control over it.

If a company borrows money from general, it will give its creditor a document ensuring
the terms and existence of the loan, which is called a debenture and the amount written
on the document is repayable at a future date.

The company must pay interest to the creditor during the period of the loan. In order to
improve the chances of recovering the debt from the company if it becomes bankrupt, a
creditor may take a charge over some or all of the assets of the company as collateral.
So it means that the creditor has a legal interest in that asset and the company cannot
sell it without either paying off the debt or getting the permission of the creditor which
increases the creditor’s chance of being repaid on the bankruptcy of the company as it
has a privileged claim on money from the bankruptcy.

”
CHARACTERISTICS OF DEBENTURES

 ·Debenture is a movable property. It is in the form of a certificate of indebtedness

of the company and issued by the company itself. It generally creates a charge
on the undertaking or undertakings of the company. There is usually a specific
date of redemption.
 ·The debenture holders are creditors to the company and they donot have any
claim of ownership of the company unlike share holders. The company is only
under debt of the debenture holders.
 ·As the debenture holders are not the owner of the company so they are not
entitled with the administration and management of the company.
 ·The debenture holder need not be concerned with the profits or loss of the
company, they have a fixed rate of interest on the principal amount which they
get every year irrespective of the financial condition of the company.
 ·Debentures usually have a charge on the assets of the company, which means
that if the company on liquidation is not able to repay the amount the debenture
holders can sell of property of the company to recover money.
 ·There is an undertaking given by the company to repay debenture holders the
principal amount along with the interest at the state time.
 ·The debenture holders cannot claim the privilege to vote in any meeting of the
company.
 ·When the company is winding up, the first priority of the company is to repay to
the debenture holders of the company hence , there is no risk involved of loss of
money of the debenture holders.
 ·There is a series with pari passu clause which is usually a part of the debentures
being issued and it would be equal as security and if the security is being
enforced, the amount shall be discharged relate ably. If there is deficiency of
assets, the division will be proportionately.
KINDS OF DEBENTURE

Debentures are generally classified into different categories on the basis of:

(1)Convertibility of the instrument

(2)Security of the instrument

(3)Redemption ability

(4)Registration of Instrument

1.on the basis of convertibility, Debentures are classified into following

categories:

(A) Non Convertible Debentures– This type of debentures cannot be converted either
into preference shares or equity shares. Non-convertible debentures can either be
unsecured or secured. These type of debentures are usually redeemed only on the
maturity of a predetermined period which may be 10 or 20 years. These instruments
retain the debt character and can not be converted into shares.

(B) Partly Convertible Debentures - Apart of these instruments are converted into
equity shares in future at the notice of issuer. The issuer decides the ratio for
conversion. The ratio is usually decided at the time of subscribing the debentures. If a
debenture converts some of his debentures into share, he a member as other
shareholders for those shares, amending the rights accordingly. Thus convertible
debentures may be called as debentures which can be converted by he debenture
holder after a specific time.

(C) Fully Convertible Debentures -These are those debentures which can be
converted into equity or preference shares after a certain period at predetermined rate
of exchange. If a debenture converts his debentures into share, he cease to be the
creditor of the company and become a member as other shareholder, amending the
rights accordingly. Thus convertible debentures may be called as debentures which can
be converted by he debenture holder after a specific time. At the time of issue of
debenture the rate at which the exchange takes place is decided . Till the time of
conversion only the interest is paid to the debenture holder and after that the rights
exercised would same as shareholder. In order to issue convertible debentures prior
approval of the shareholders is mandatory. The sanction of central government also
required for issuing convertible debentures.

(D) Optionally Convertible Debentures- It is a t the option of the debenture holder to

convert these debentures into share. The price for such conversion is decided by the
issuer and was consented upon by both parties at the time of issue of debenture.

2. on the basis of security, Debentures are classified into following categories:

(A) Secured Debentures –The instruments which are secured as there is a charge on
the fixed assets of the company. This is to secure the debenture holder as and when
the issuer makes a defaults in the payment of either the principal or interest amount, the
assets of the issuer can be sold of in order to do away with the liability to the debenture
holders by repayment. In Companies Act, 2013 there is a provision in Section 71(3)
which says that a company has right to issue secured debenture subjected to the
conditions of the government of India.

(B) Unsecured Debentures– These type of debentures are unsecured in the way that if
there is a default in payment of the principal amount or interest amount the debenture
holder will have be along with other unsecured lenders and hence could not sell any
property or anything for repayment hence they are also called naked debentures.
3. on the basis of Redeemability, Debentures are classified into following
categories:

(A)Redeemable Debentures -The debentures which are issued with the option of
redemption on demand or after serving notice or at a fixed date or through a system of
periodical drawing. Usually debentures are of redeemable nature and after redemption
they can either be cancelled or can be reissued. The priorities and rights of the person
who is reissued the debentures shall be same as the debentures were never redeemed.

(B)Perpetual or Irredeemable Debentures –an irredeemable debenture is a type of

debenture in which there is not fixed time for the issuer to repay the amount. The
debenture holder does not have right to demand for the payment of principal amount
until and unless the company does not default in making payment of the interest
regularly. If a company is going into liquidation it has to pay for all the debenture
whether redeemable or irredeemable.

4.on the basis of Registration, Debentures are classified into following

categories:

(A) A Registered Debentures- The debentures which are made in the name of a
particular individual who is registered by the company as the debenture holder on there
register of debenture holders and also his name appears on the debenture certificate.
These debentures can be transferred in the similar way as shares are transferred by
due means of proper instrument which includes stamped duly, executed and satisfying
the demands under Section 56 of the Companies Act, 2013.

(B) Bearer Debentures- These shares on the other hand are negotiable instrument are
made out to bearer and so are transferrable by only delivery like share warrants. The
person to whom a beared debenture is transferred becomes a "holder in due course"
and he has a right to recover and receive the principal amount along with interest on it.
ISSUE OF DEBENTURES

The manner of issuing of debentures is usually similar to that of issuing share, it is

through prospectus inviting applications for debentures, the money is to be paid in
installments on application, allotment and on specific dates. Debentures can, be issued
in three ways.

1. At par: When the amount collected for it is equal to the nominal value of
debentures ,it is said to have been issued at par. e.g. the issue of debentures of
Rs. 300/- for Rs. 300/-
2. At Discount: When the amount collected is less than the nominal value,
debenture is said to have been issued at discount. For e.g., issue of debentures
of Rs. 300/- for Rs. 270/-. The difference of Rs. 30/- is the discount and is called
discount on issue of Debentures. This discount on issue of debentures is a
capital loss.
3. At Premium: A debentures is said to be issued at a premium , when the price
charged is more than its nominal value. e.g., issue of debentures of Rs. 300 each
for Rs. 320, the excess amount over the nominal value i.e., Rs. 20 is the
premium on issue of debentures. Premium received on issue of debentures is a
capital gain. This Premium on issue of debentures could not be used for
distribution of dividend. Premium on debentures reflected under Surplus and the
head Reserves on the liability side of the Balance Sheet.

Time limit for issue of debenture certificate

The allotee is entitles to be issued with the debenture certificate within a period of 6
months from the date of allotment. It is provided for in Section 56(4) of the Companies
Act, 2013. The Section 56(6) of the Companies Act, 2013 provides that if a company
fails to issue the debenture certificate within the time limit, it shall be made liable to pay
a fine minimum of 25,000 rupees which may extend to 5,00,000 rupees. The officer who
who is in default shall by punished with a fine which is 10,000 rupees minimum and
extending to 1,00,000 rupees.

Further in Section 71 of the Companies Act, 2013 there are provisions with respect to
issue of debenture which is as follows –

(a) With an approval by a special resolution passed at a general meeting, the company
can issue debentures which can be converted into shares either partly or wholly at the
time of redemption of debentures.

(b) There shall not be any debenture with any voting rights.
(c) There are certain terms and conditions prescribed subject to which the company can
issue secured debentures As per rule 18 of Companies (Share conditions and
Debentures) Rules[6], 2014 subject to some conditions only secured debentures of
redeemable nature can be issued, the conditions are as follows-

·The redemptions date for secured debenture shall not exceed 10 years from the time of
issue of debentures. However , there are a few classes of company which can issue
secured debentures exceeding the period of 10 years but not more than 30 years

(i) The companied which are involved in setting of infrastructural projects

(ii) Infrastructure Finance Companies[7]

(iii) Infrastructure Debt Fund Non- Banking Financial Companies[8]

·The issue of debenture shall be secured by creation a charge on the assets and
properties of the company, value of which shall be substantial enough for the due
repayment of the principal amount of the debentures along with the interest on it.

It is mandatory for the company to appoint a debenture trustee[9]prior to issue of letter

of offer or prospectus for subscription of its debentures. The company shall within 60
days of allotment of debenture, execute a trust deed in to prevent injustice and protect
the interest of the debenture holders

·In the favor of debenture trustee a mortgage or charge shall be created as the security
for debentures, which can be-

(i) Any specific movable property of the company which is not in the nature of pledge or

(ii) Any specific immovable property situated anywhere or any interest therein.

(d) For the purpose of securing the form of debentures trust deed, issue of debentures,
the procedure for the debenture holder to probe into the trust deed and to get copies
thereof, quantum of debenture redemption reserve needed to be created. The rules
framed includes that the trust deed has to be executed by the company issuing
debentures within 3 months of the closure of the offer or issue.
Listed below are some of the typical terms found in a debenture.
Repayment date
The amount that the company borrows must be repaid at some future date. Debenture
is a fixed loan and for this type of loan, repayment is due on a particular future date or a
loan repayable on demand and it will be mentioned in the loan document.
Interest
As debenture is a kind of loan, the company must pay the interest to its creditors
according to the frequency and rate of the interest mentioned in the debenture
document. The rate can either be fixed or it can be varies with bank rates.
Power to appoint a receiver
If the company defaults under the terms of a debenture, the debenture holder’s right to
recover the money owed to them is by the appointment of a receiver in accordance with
the terms of the debenture. Thus, the power to appoint a receiver should be contained
in the debenture.
The receiver’s job is to take possession of the assets that are subject to the charge.
After making provision for payment of any prior creditors of the company, the receiver
can sell enough of the charged assets to pay what is due to the debenture holder,
together with interest and costs.
When this is achieved, the receiver retires from office and the company is allowed to
carry on its business again. Frequently, however, the appointment of a receiver and the
sale of its assets will force the company into liquidation.
Power of sale
In order to recover the sum due to the debenture holder, a receiver appointed by the
debenture holder will need the power to sell the assets, which are the subject of the
charge. Thus, a power of sale should be included in the debenture.
Apart from the power of sale, it is advisable to list out in the debenture some other
powers of a receiver, e.g. the power to take legal proceedings.
Security
Although there is no need for a loan to be secured, the debenture holder’s position is
improved if they do take a charge over the company’s assets. The security can be in the
form of a fixed charge or a floating charge, or a combination of the two over the assets
of the company.
Fixed charge
A fixed charge is taken over specific property, e.g. land, buildings, fixed plant and
machinery. Upon the giving of a fixed charge, the company, though still is the legal
owner of the charged asset, cannot sell or deal with the asset without the permission of
the charge holder.
Floating charge
Unlike a fixed charge, a floating charge does not attach to a specific asset. It ‘floats’
over a class of assets, while the component parts of that class of assets may be
changing as the company still has the power to deal with any of the assets within that
class without the need to consult the charge holder.
A debenture can provide that the floating charge can ‘crystallize’ in specific
circumstances. For example, when the company ceases to carry on business or goes
into liquidation, or when the debenture holder appoints a receiver to enforce their
security.
When a floating charge crystallizes, it no longer hovers over a class of assets which are
subject to the charge, but becomes equivalent to a fixed charge because from the time
of crystallization, the company cannot deal with any item within the class of assets
without the consent of the charge holder.
Usually, debentures containing a floating charge also impose a prohibition on the
company granting any fixed charges over the assets that are the subject of the floating
charge. This is because fixed charges that are created after the floating charge would
rank before the floating charge for payment in the event of insolvency of the company.
In other words, despite the fact a fixed charge is registered after a floating charge, it
would be paid in preference to the floating charge.
Registration
Once the company has formally entered into a debenture, it is the company’s
responsibility to register prescribed particulars of any charge contained in the debenture
at Companies House within 21 days of creation of that charge.
If the debenture contains a floating charge and a prohibition on the creation of later fixed
charges taking priority, the prohibition should be noted on the prescribed particulars as
well.Although it is primarily the responsibility of the company to register particulars of
any charge, it is the chargee (i.e. the debenture holder) who suffers if the charge is not
registered or is registered late.So, in practice, the debenture holder normally registers
the charge. If the charge is not registered at Companies House, it is void against an
administrator or liquidator of the company and against any person who acquires an
interest in the charged asset. Any debts owed by the company to the debenture holder
still remain outstanding but are treated as unsecured debt in the event of the company’s
insolvency and will be added to all the other debts which the company owes to be paid
right at the end of the insolvency process. If a fixed charge is taken over land, it should
be registered at the Land Registry. Details of any charge created by the company
should also be kept in the company’s own register of charges at its registered office
DEBENTURE TRUST DEED

At the of issue of debentures for public subscription, it involves a large number of

debenture- holder , it is not practicable to create a individual charges in favor of
thousands of debenture – holders. Hence , the most convenient and common for
securing all the debenture holders is to execute a trust deed conveying the property
belonging to the company to the trustees and announcing a trust in favor of debenture-
holders. A trust deed usually gives the trustees a free charge on the property of the
company except for the freeholds and leaseholds on which it has fixed charge. A trust
deed is the documents containing the conditions put on the debentures and the
entitlements of the debenture – holders and the company. Following powers are given
to the trustees through the trust deed:-

(i) To get a mortgage over that property of the company’s property in which case the
title deeds are transferred to them and the company can not further create charge
ranking in the priority of debentures.

(ii) To renew leases and to lease or sell the property.

(iii) To trade of the mortgaged property for any other suitable property.

(iv) To adjust claims.

(v) To defend actions and also to commence them.

(vi) To amend the current contracts applicable on any part of the property.

(vii) To appoint a receiver on the security becoming enforceable.

CONCLUSION

A debenture is one of the capital market instruments which is utilized to raise medium or
long haul stores from open. A debenture is basically an obligation instrument that
recognizes a credit to the organization and is executed under the normal seal of the
organization. The debenture record, called Debenture deed contains arrangements as
to installment, of intrigue and the reimbursement of important sum and giving a charge
on the advantages of a such an organization, which may give security for the installment
over the a few or every one of the benefits of the organization. Issue of Debentures is a
standout amongst the most widely recognized techniques for raising the assets
accessible to the organization. It is an imperative wellspring of back.All organizations
are offered energy to obtain by their articles which settle the greatest furthest reaches of
borrowings. The ability to obtain monies and to issue debentures (regardless of whether
in or outside India) must be practiced by the Chiefs at an appropriately gathered
meeting. Where the organization obtains without the expert presented on it by the
Articles or past the sum set out in the Articles, it is a ultra vires acquiring and henceforth
void. Ultra vires borrowings can't be sanctioned by a determination gone by the
organization as a rule meeting. If there should arise an occurrence of ultra vires
borrowings the moneylender has the accompanying cures: (an) Injunction and
Recovery, (b) Subrogation, (c) Suit against Directors. A debenture is a record given by
an organization under its seal as a confirmation of an obligation to the holder generally
emerging out of a credit and most generally secured by a charge. Debentures might be
of various types, viz. redeemable debentures, enlisted and conveyor debentures,
secured and unsecured or stripped debentures, convertible debentures. A debenture
stock is an obtained capital combined into one mass for comfort. An advance makes a
privilege in the loan boss to request reimbursement, and the substance of an obligation
is a risk upon the indebted person to reimburse the cash. A debenture trust deed is one
of the few instruments required to be executed to secure recovery of debentures what's
more, installment of enthusiasm on due dates. Section 71(4) of the Act required each
organization to make a debenture reclamation save record to which sufficient sum
should be credited out of its benefits accessible for installment of profit until the point
that such debentures are recovered and might use the same only for recovery of a
specific set or arrangement of debentures as it were. Certificate of store is an archive of
title to a period store. Commercial paper alludes to unsecured promissory notes issued
by credit commendable organizations
 BIBLIOGRAPGY

BOOKS

 COMPANY LAW BY H.K SAHARAY

 COMPNAY LAW BY AVTAR SINGH
 COMPANY LAW BY R.K BANGIA

BARE ACT

 COMPANIES ACT 2013

ONLINE SOURCES

 WWW.LEGALESSSAYS.COM
 WWW.SCRIBLERS.COM
to get supports on a here and now premise.