Commercial Correspondence and Secretarial Practice · Ch 3 — Debenture
Procedure for Issue of Debentures under the Companies Act, 2013
Procedure for Issue of Debentures under the Companies Act, 2013
Issuing debentures is not a matter the company's officers can simply decide informally — the Companies Act, 2013, read with the Companies (Share Capital and Debentures) Rules, 2014, lays down a defined procedural sequence, and a Gujarat board Std 12 Secretarial Practice student should be able to trace it step by step.
The process ordinarily begins with a resolution of the Board of Directors, since the power to borrow money and to issue debentures for that purpose is a power the Board exercises under Section 179(3) of the Companies Act, 2013 at a duly convened Board meeting. Where the debentures are proposed to be issued with an option to convert them into shares, however, Section 71(1) requires that this option itself be approved by a special resolution passed at a general meeting of the shareholders, since converting debt into equity affects the ownership structure of the company and cannot be authorised by the Board alone; a special resolution (and compliance with the private-placement conditions of Section 42, where applicable) is likewise generally required where debentures are offered otherwise than to the public at large.
Where the company proposes to issue secured debentures, or to make an offer or invitation to the public, or to more than the prescribed number of persons, for subscription of its debentures, Section 71(5) requires that one or more debenture trustees be appointed before such issue or offer is made, and their written consent obtained in advance. The debenture trustee's statutory role, under Section 71(6), is to take all steps necessary to protect the interests of the debenture-holders — calling for periodic reports from the company, ensuring the security created is properly maintained, and monitoring the company's compliance with the terms of the issue. Closely tied to the trustee's appointment is the execution of a debenture trust deed under Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014, which sets out, in a single formal document, the security offered, the rights and duties of the trustee, and the terms and covenants binding the company and the debenture-holders for the life of the issue. …
A person or body corporate appointed by a company under Section 71(5) of the Companies Act, 2013, before making a public offer or an offer to more than the prescribed number of persons for subscription of its debentures, whose statutory duty under Section 71(6) is to protect the interests of debenture-holders by monitoring the company's …
A formal deed executed under Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014, between the company and the debenture trustee, setting out the security offered for the debentures, the rights of the trustee to act on behalf of the debenture-holders, …
A reserve which certain classes of companies issuing debentures are required, under Rule 18(7) of the Companies (Share Capital and Debentures) Rules, 2014, to create out of profits otherwise available for dividend, so that funds are specifically set aside in advance to meet the company's obligation to redeem the debentures — the amount so credited cannot …