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Total Number of Subscribers: 1626 |
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Date: 1st May 2010 |
Compiled by: M Sathya Kumar |
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Debentures – Meaning A debenture is an instrument of debt executed by the
company acknowledging its obligation to repay the sum at a specified rate and
also carrying an interest. It is only one of the methods of raising the loan
capital of the company. A debenture is thus like a certificate of loan or a
loan bond evidencing the fact that the company is liable to pay a specified
amount with interest and although the money raised by the debentures becomes
a part of the company's capital structure, it does not become share capital. Provisions regulating issue of Debentures The power to issue debentures can be exercised on behalf
of the company at a meeting of the Board of Directors {Section 292(1)(b) of
the Companies Act}. A public company may, however, require the approval of
shareholders to borrow money in excess of the aggregate of its paid up
capital and free reserves.{Section 293 (1) (d)}. Consent of the shareholders
would also be required for selling, leasing or disposing of the whole or
substantially the whole of the undertaking of the company under section 293
(1) (a). Debentures have been defined under Section 2 (12) of the Act to
include debenture stocks, bonds and any other securities of the company
whether constituting a charge on the company's assets or not. The attributes of a debenture are: Ø A movable property. Ø Issued by the company in the form of a certificate of
indebtedness Ø It generally specifies the date of redemption, repayment
of principal and interest on specified dates. Ø May or may not create a charge on the assets of the
company. Section 372 A of the Companies Act also regulates
inter-corporate loan and investments and stipulates the ceiling limits on
investments and the amount of loan that can be borrowed by a company. The
explanation clause of this section states that the loan shall include
debentures. Section 117 to Sections 123 of the Companies Act, 1956
regulate the provisions relating to debentures, appointment of debenture
trustees, their duties, creation of Debenture Redemption Reserve Account,
liability of trustees etc. The debentures issued under the Act shall not carry any
voting rights. In the case of public issue of debentures, there would be a
large number of debenture holders on the register of the company. As such it
shall not be feasible to create charge in favour of each of the debenture
holder. A common methodology generally adopted is to create Trust Deed
conveying the property of the company. A Trust deed is an arrangement
enabling the property to be held by a person or persons for the benefit of
some other person known as beneficiary. The Trustees declare the Trust in
favour of the debenture holders. The Trust Deed may grant the Trustees fixed
charge over the freehold and leasehold property while a floating charge may
be created over other assets. The Company shall allow inspection of the Trust
Deed and also provide copy of the same to any member or debenture holder of
the company on payment of such sum as may be prescribed. Failure to provide
the same would invite penalties by way of fine under the Act. Any provision
contained in the Trust Deed, which exempts a Trustee from liability for
breach of Trust, is void. As per Section 125 (4) of the Companies Act,
registration of a charge for purpose of issue of debentures is mandatory.
Section 128 stipulates that where a company issues series of debentures which
is secured by charge, benefit of which will be available to all debenture
holders pari passu, the company shall file the prescribed particulars in Form
10 and 13 with the Registrar of Companies for registration of charge. These
forms shall be filed within 30 days after the execution of the deed. Appointment and Duties of Debenture
Trustees In terms of Section 117 B, it has been made mandatory
for any company making a public/rights issue of debentures to appoint one or
more debenture trustees before issuing the prospectus or letter of offer and
to obtain their consent which shall be mentioned in the offer document. The
Debenture Trustees shall not: a. beneficially hold shares in a company. b. be beneficially entitled to
monies which are to be paid by the company to the debenture trustees. This section also lists the functions that shall be
performed by the Trustees. These include: i.
Protecting the interests of the debenture holders by addressing their
grievances. If the debenture trustees are of the opinion that the
assets of the company are insufficient to discharge the principal amount,
they shall file a petition before the Central Government and the latter may
after hearing the parties pass such orders as is necessary in the interests
of the debenture holders. As per the SEBI (Debenture Trustees) Regulations,
1993, {hereinafter referred to as the 'Regulations'} a Debenture Trustee can
be a scheduled bank, an insurance company, a body corporate or a public
financial institution. Debenture Trust Deed A
Debenture Trust Deed shall, interalia, include the following: a. An undertaking by the company to pay the Debenture
holders, principal and interest. b. Clauses giving the Trustees the legal mortgages over
the company's freehold and leasehold property. c. Clauses that may make the security enforceable in the
event of default in payment of principal or interest i.e. appointment of
receiver, foreclosure, sale of assets etc. d. A clause giving the Trustees the power to take
possession of the property charged when security becomes enforceable. e. Register of Debenture holders, meeting of all
debenture holders and other administrative matters may be included in the
Deed.
Creation of debenture Redemption Reserve Section 117 C of the Act casts an obligation on the
company to create a Debenture Redemption Reserve. This account will be
credited with proceeds from the profits of the company arrived at every year
till redemption of the debentures. The Act, however, does not stipulate the
time period for creation of security. SEBI regulations provides for creation
of security within six months from the date of issue of debentures and if a
company fails to create the security within 12 months, it shall be liable to
pay 2% penal interest to the debenture holders. If the security is not
created even after 18 months, a meeting of the debenture holders will have to
be called to explain the reasons thereof. Further, the issue proceeds will be
kept in escrow account until the documents for creation of securities are
executed between the Trustees and the company. Compliances under Registration Act and
Stamp Duty Act In the case of English Mortgage, the trust deed will
attract ad valorem stamp duty. After execution, such deed will be registered
with the sub registrar of Assurances. Registration charges will have to be
paid in addition to the stamp duty. While in case of an equitable mortgage,
if no document, deed etc. is signed then nothing is required to be registered
with the sub registrar of Assurances. If however, a note or letter is made
then it will attract stamp duty. It is pertinent to mention that once a
mortgage is created by registration then no further stamp duty is payable on
registration. Default In the event of failure on the part of the company to
redeem the debentures on the date of maturity, the Company Law Tribunal may,
on the application of any debenture holder, direct redemption of debentures
forthwith by payment of principal and interest due thereon. If a default is
made in complying with the orders 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 and shall also be liable to fine of not less
than Rs.500/- for every day during which the default continues. (Section
117C) Further this offence is not compoundable under section 621A of the Act. There are contradictions between
the Companies Act and the SEBI regulations on issues relating to: Utilisation of Debenture Redemption Reserves. The Act
provides that the Debenture Redemption Reserve will be used towards
redemption of debentures only whereas the SEBI regulation states that these
will be a part of the General Reserves, which can be utilised for the purpose
of bonus issues. Any debentures issued with a maturity period of 18
months or less is exempted from the creation of Debenture Redemption Reserve
Account, whereas no such exemption is provided under the Companies Act. No Public Issue/Rights Issue of Debentures shall be made
by a company unless it has appointed one or more Debenture Trustees for such
debentures whereas under SEBI guidelines, appointment of Debenture Trustees
is compulsory only in case of debentures with maturity of 18 months or more. A listed company though subjected to SEBI regulations
must comply with stringent norms between the two legislations / regulations
made there under. Article
by G.P.Sahi, a renowed lawyer. |
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