Q.Explain convertible and non-convertible debentures. What approval does the Companies Act, 2013 require before a company issues convertible debentures?
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Start your 14-day free trial to unlock the full solution →Convertibility is the classification that decides whether a debenture-holder's investment ultimately remains a loan or is transformed into a share of ownership in the company, and it is one of the classifications the Companies Act, 2013 regulates directly by name.
A convertible debenture carries a built-in option, exercisable at the time of redemption, allowing the debenture into equity shares of the issuing company, either wholly (the entire face value is converted into shares) or partly (only a portion is converted, with the balance redeemed in cash). Section 71(1) of the Companies Act, 2013 expressly permits this arrangement but conditions it strictly: a company may issue debentures with an option to convert them into shares, wholly or partly, only if the issue of such debentures has itself been approved by a special resolution passed at a general meeting of the shareholders. This requirement exists because converting a debt instrument into equity ultimately dilutes and alters the ownership structure and voting balance of the company — a consequence too significant to be authorised by the Board of Directors alone, and one the Act therefore reserves for the shareholders' own decision, requiring not merely an ordinary majority but the higher three-fourths majority a special resolution demands. …
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