Q.Briefly explain the provisions of Companies Act, 2013 for issue of debentures.

Under Section 71 of the Companies Act, 2013 a company may issue debentures subject to conditions meant to protect debentureholders — no voting rights, security of a charge for secured debentures, creation of a Debenture Redemption Reserve, appointment of a Debenture Trustee, and proper payment of interest and redemption. Convertible debentures need shareholder approval by special resolution.

A debenture is a written instrument acknowledging a debt of the company and carrying a fixed rate of interest. The issue of debentures is regulated mainly by Section 71 of the Companies Act, 2013 along with the Companies (Share Capital and Debentures) Rules. The important provisions are:

1. No voting rights: A company cannot issue debentures carrying any voting rights, because debentureholders are creditors and not owners of the company.

2. Convertible debentures need special resolution: A company may issue debentures that are convertible (wholly or partly) into shares, but only if such issue is approved by the shareholders by passing a special resolution in a general meeting.

3. Secured debentures: Where debentures are secured, they must be backed by a charge on the assets of the company and must be redeemed within the period prescribed by the rules. A Debenture Trust Deed has to be executed to protect the debentureholders' interest.

4. Appointment of a Debenture Trustee: If a company issues a prospectus or invites more than 500 persons to subscribe to its debentures, it must appoint one or more Debenture Trustees to safeguard the interests of the debentureholders before the issue.

5. Debenture Redemption Reserve (DRR): The company must create a Debenture Redemption Reserve out of its profits available for dividend and use it only for the redemption of debentures, so that funds are available for repayment.

6. Payment of interest and redemption: The company is bound to pay interest on the debentures and redeem them in accordance with the terms and conditions of their issue.

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