Secretarial Practice · Ch 4 — Issue of Debentures
Provisions for Issue of Debentures under the Companies Act, 2013
Provisions for Issue of Debentures under the Companies Act, 2013
The issue of debentures is governed chiefly by Section 71 of the Companies Act, 2013, read with the Companies (Share Capital and Debentures) Rules, 2014, and a Std 12 Secretarial Practice student should be able to state the main statutory safeguards this framework builds around a debenture issue, since a debenture-holder, unlike a shareholder, has no vote and no management control to protect their own interest with.
Section 71(1) permits a company to issue debentures with an option to convert them into equity shares, whether wholly or partly, but only if the issue of such convertible debentures has first been approved by a special resolution passed at a general meeting of the company — an ordinary debenture issue carrying no conversion option needs no such special resolution, but a convertible one does, precisely because conversion will eventually dilute the existing shareholders' holding. Section 71(2), already noted above, is unambiguous: no company shall issue any debentures carrying voting rights. This is the clearest statutory line the Act draws between a share and a debenture — however large or influential a debenture-holder's stake, the law keeps company control strictly with its members.
Section 71(3) requires that where debentures are to be secured, the company shall create a charge on its assets or properties, as security, and in favour of a Debenture Trustee appointed for the purpose — this is the statutory root of the secured-debenture arrangement outlined in the previous section. A Debenture Trustee is typically a scheduled bank, a public financial institution, or an insurance company, and is appointed by the company through a Debenture Trust Deed before the debenture issue opens to the public; the Trustee's role is to hold the charged security on trust for the whole body of debenture-holders and to protect their collective interests, since individual, scattered debenture-holders otherwise have no practical means of monitoring the company or enforcing the security themselves. …
A scheduled bank, public financial institution, or insurance company appointed by a company, under a Debenture Trust Deed and as required by Section 71(3) of the Companies Act, 2013, to hold the security created for a secured debenture issue on trust for the entire body of debenture …
A reserve a company issuing debentures must create out of profits available for dividend, as required by Section 71(4) of the Companies Act, 2013, usable for no purpose other than redeeming the very debentures for which it was created — ensuring the company has genuinely …