Debentures

Section 2(30) of the Companies Act, 2013, defines a debenture as a debt instrument issued by a company, including debenture stock, bonds, or any other instrument that evidences a debt. This debt may or may not constitute a charge on the assets of the company. Money market instruments as referred to in Chapter III of the RBI Act or other instruments prescribed by the Ministry are excluded from this definition.

Non-Convertible Debentures (NCDs)

Non-Convertible Debentures (NCDs) are debt instruments issued by a company that cannot be converted into equity shares. These debentures are redeemed at the end of a specified period. An NCD represents an obligation by the company to repay the principal amount along with a specified rate of interest.

Conditions for Issuing Secured NCDs

1. Listing Requirement: If a company's NCDs do not constitute a charge on its assets, it is mandatory for the securities to be listed on a recognized stock exchange to avoid being classified as deposits.
2. Redemption Period: The redemption period should not exceed 10 years from the date of issue. Exceptions include infrastructure finance companies, companies engaged in infrastructure projects, Infrastructure Debt Fund Non-Banking Financial Companies, and others permitted by the Ministry or RBI, which can issue debentures for up to 30 years.
3. Security Creation: The issue must be secured by creating a charge of adequate value for the payment of the debentures and the interest thereon.
4. Debenture Trustee: A debenture trustee must be appointed, and a charge must be created in their favor.
5. Trustee Qualifications and Role: The qualifications and role of the debenture trustee must be clearly defined.
6. Debenture Redemption Reserve (DRR): A company must deposit or invest at least 15% of the amount of its debentures maturing during the following year by April 30th each year.

Procedure for Issuance of NCDs through Private Placement

1. Identification of Subscribers: The Board must identify potential subscribers and prepare a list of them.
2. Preparation of Draft Forms: Draft forms PAS-4 (Private Placement Offer Cum Application Letter) should be prepared for Board approval.
3. Appointment of Debenture Trustee: For secured debentures, a debenture trustee must be appointed before issuing the subscription offer and no later than 60 days after allotment.
4. Separate Bank Account: A separate bank account should be opened to receive the subscription amount.
5. Asset Identification: Identify the company assets on which the charge will be created (for secured debentures).
6. Board Meeting: Issue a notice for a Board meeting at least 7 days in advance, including the agenda, notes, and draft resolutions.
7. Board Resolutions: Pass resolutions for:
   • Approval of NCD issuance and terms
   • Approval of Form PAS-4
   • Appointment of debenture trustee, if required
   • Approval of Debenture Trust Deed
   • Opening of a separate bank account
   • Increasing the company's borrowing limit, if necessary, subject to members' approval in a general meeting
   • Issuing notice for a general meeting to pass the special resolution under section 180(1)(c) of the Act

Allotment of NCDs

• Allotment Deadline: Allot NCDs within 60 days of receiving the subscription money.
• Board Resolutions Post-Allotment:
  •     - Allot NCDs
  •     - Authorize directors to issue and sign debenture certificates
  •     - Enter into a Debenture Trust Deed (SH-12)
  •     - Create a Debenture Redemption Reserve
  •     - Create a charge on company assets
  •     - File e-form PAS-3 with ROC within 15 days of allotment

Post-Allotment Requirements

• - Fund Utilization: Monies raised through private placement cannot be utilized until the allotment is made and the return of allotment is filed with ROC.
• - Filing Charge Creation: File e-form CHG-9 with ROC within 30 days of charge creation.
• - Register Entries: Make entries in registers maintained under Section 88 of the Act within 7 days of the Board's approval of the debenture allotment.
• - Debenture Certificate Issuance: Issue debenture certificates within 6 months from the date of allotment.
• - Stamp Duty Payment: Pay the stamp duty on the allotment of NCDs.

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Article Compiled by:-

Neel Lakhtariya

(LegalMantra.net Team)

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.