A Step by Step Guide for Issue of Debentures

Finance is the blood of any organization and when an organization requires finance, issuing debenture is one of the best sources of funding for the organization. A debenture is...
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A Step by step guide for issue of Debentures

Finance is the blood of any organization and when an organization requires finance, issuing debenture is one of the best sources of funding for the organization. A debenture is issued to the public by a company. Public purchases the debentures i.e. they have financed the Company and in return the Company owes them. A debenture is an acceptance given to the Public by the Company.

Pros and Cons of Funding through debenture

Pros-

  • A company can raise the large amount by the issue of debentures because investors give weight to the safety of capital at a fixed rate of return.
  • For the purpose of income-tax, the company enjoys the benefit by issuing debentures as the interest paid on debentures is deductible from the profits of the company.
  • No voting rights are conferred on the debenture- holders and as a result, they cannot weaken the control of existing shareholders.
  • The debentures can be issued for long periods as a result of which the company can take up the projects for further expansion.
  • Usually, the rate of interest is lower than the rate of the dividend payable on preference shares and equity shares. So raising capital through debentures is less costly.
  • Company also get benefits of TAX Shield on the interest paid for debenture
Cons-
  • The company is obliged to bear a fixed burden of interest, irrespective of the profits earned by the company.
  • Due to one or more mortgage charges on the assets of the company (necessary to issues debentures), debentures cause the loss of credit in the stock market.
  • There is the danger of liquidation if the company fails to pay interest at the stipulated time. Debentures are usually issued in high denominations and as such common investors cannot purchase debentures.

What is debenture?:

Section 2 (30) of the Companies Act, 2013 define inclusively debenture as “debenture” includes 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.

Types of debentures:

  • Secured Debenture – A “secured debenture” is backed by a specific piece of property, for example, a factory or a pipeline or a bunch of oil wells.
  • Unsecured Debenture – An “unsecured debenture” is basically a loan without any protection. They are backed only by the general creditworthiness of the issuer.

Pre-requisites at the time of issuing debentures:

  • A company may issue debentures with an option to convert it into shares, wholly or partly on the condition that it shall be approved by passing a special resolution at the general meeting.
  • No company shall issue any debentures carrying any voting rights.
  • A debenture trustee shall be appointed before the issue of prospectus or letter of offer for subscription of debentures and within a period of 60 days from the date of allotment, a debenture trust deed is made to protect the rights and interest of debenture holders.
  • Where debentures are issued by a company, it shall constitute a Debenture Redemption Reserve account out of the profits of the company available for payment of dividend and the amount credited to such account shall not be used by the company except for the redemption of debentures.
  • No company shall issue a prospectus or make an offer or an invitation to the public or to its members exceeding 500 members for the subscription of its debentures, unless the company has, before such issue or offer, chosen one or more debenture trustees and the conditions governing the appointment of such trustees as may be prescribed by the act.

In case of failure to redeem debentures on due date:

  • A company has to pay interest and redeem debentures in accordance with the terms and conditions of the issue and in case of failure of redemption or payment of interest on due date, the Tribunal may on application of any or all the debenture holders or debenture trustees direct, by order, the company to redeem debentures immediately on payment of principal and interest due thereon.
  • At the time of default with regard to compliance with the order of Tribunal, every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with a fine which shall not be less than Rs. 2 lakh but which may extend to Rs. 5 lakh, or both.

Conditions for issuing of secured debentures:

  • A company can issue secured debentures for a period not exceeding 10 years from the date of its issue. If the company is engaged in setting up of infrastructure projects it can issue debentures for a period exceeding 10 years but not exceeding 30 years.
  • The company has to secure the debentures by way of creation of charge, on the assets of the company that is of the value which is sufficient for repayment of principal and interest.
  • A debenture trustee shall be appointed before the issue of prospectus or letter of offer for subscription of debentures and within a period of 60 days from the date of allotment, a debenture trust deed is made to protect the rights and interest of debenture holders.
  • the security for the debentures by way of a charge or mortgage shall be created in favor of the debenture trustee on-
    • Any specific movable property of the company (not being in the nature of pledge); or
    • Any specific immovable property wherever situate, or any interest therein.

Procedure for issue of debentures:

  • 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 Record of Private Placement of Offer in Form No. PAS – 5
    • Approval of Debenture Trustee Agreement and appointment of a Debenture Trustee (In case of Secured Debentures only)
    • Appointment of an expert for valuation
    • Authorization for creation of charge on the assets of the company
    • Approval of Debenture Subscription Agreement
    • To fix day, date and time for the extraordinary general meeting
  • At the time of the appointment of SEBI registered 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.

Forms to be filed with Registrar of Companies for Debenture:

  • Form No. PAS – 4 and PAS – 5 in Form No. GNL – 2
  • Offer Letter in Form No. MGT – 14
  • Board resolutions, Special Resolution, Debenture Subscription Agreement, Debenture Trustee Agreement etc in Form No. MGT – 14
  • Form No. PAS – 3 (Return of allotment)
  • Form No CHG – 9 for the creation of charge on assets of the Company.

Certificate of debenture:

The certificate of debenture shall be issued within 6 months of allocation if there is any.

Note: If you have any query or question please comment in the comment box below or contact us. We would love to help you.

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 Who cannot get benefits of fast track exit? | proprietorship business in india
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Who cannot get benefits of fast track exit? | proprietorship business in india
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Finance is the blood for any organization and when an organization require finance, issuing debenture is one of the best source of funding for the organization.
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