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

Section 71 of the Companies Act, 2013 and its rules govern the issue of debentures: no voting rights, secured debentures require a charge and a trustee, a Debenture Redemption Reserve must be created, conversion needs a special resolution, and the company must honour interest and redemption on time, with penalties for default.

Debentures are a major source of borrowed capital, and to safeguard the debenture holders (who are creditors), the Companies Act, 2013 — chiefly Section 71 together with the Companies (Share Capital and Debentures) Rules — prescribes the following provisions for their issue:

1. No voting rights: a company cannot issue debentures carrying voting rights. Debenture holders are lenders, not owners, so they have no say in management.
2. Convertible debentures need special resolution: a company may issue debentures with an option to convert them (wholly or partly) into shares, but only if such issue is approved by a special resolution passed in a general meeting.
3. Secured debentures and charge: secured debentures may be issued subject to the prescribed conditions, including the creation of a charge on the company's assets and completion of redemption within the prescribed period.
4. Appointment of Debenture Trustee: where debentures are offered to more than the prescribed number of persons (generally more than 500), the company must appoint a Debenture Trustee before the issue and execute a Debenture Trust Deed to protect the holders' interests. The trustee must act in the holders' interest and report any breach.
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 to repay the holders.
6. Payment of interest and redemption: the company must pay interest and redeem the debentures in accordance with the terms of the issue; it cannot default. …