Debenture

Companies Act, 1956

Borrowing Powers of a Company

The Companies Act does not expressly empower companies to borrow money,
and therefore, most of the companies expressly provide for such borrowing
powers in the Memorandum and articles. In such cases, where Memorandum
and articles of association authorises the company to borrow, they also
provide as to how and by whom these powers shall be exercised. It may also fix
up the maximum -amount which can be borrowed by the company.
The power to borrow money is generally exercised by the directors but Articles
normally provide for certain restrictions on their power to borrow, to the
aggregate of the paid-up capital of the company and its free reserves. The company
shall not, except with the consent of such public company or subsidiary in
general meeting, borrow moneys where the moneys to be borrowed,
together with the moneys already borrowed by the company (apart from
temporary loans obtained from the company's bankers in the ordinary
course of business) will exceed the aggregate of paid up capital of the
company and its free reserves, (free reserves that is to say reserves not set
apart for any specific purpose)
Debenture
The term’ debenture' simply means a document acknowledging a loan
made to a company and providing for the payment of interest on the sum
borrowed until the debenture is redeemed, i.e., the repayment of the
principal sum. Since the debentures are secured funds the charge is
created on the assets of the company.

Kinds of debenture

Bearer Debentures
By making debenture repayable to bearer they are invested with the character
of a negotiable instrument, so as:
1. to make them transferable free from equities;
2. to render the delivery of a debenture and any interest coupon a good
discharge to the company;
3. to enable the bearer to sue the company in his own name, if necessary;

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 To ensure a good title to any person who acquires the debenture
4.
bonafide for consideration, notwithstanding any defect in the title of the
person from whom he acquires it."
The interest on 'bearer debentures' is paid by means of attached
coupons. On maturity the principal sum is paid to the bearer.
2. Registered Debentures

These are debentures which are payable to the registered holders, i.e.,
persons whose names appear in the register of debentures. Such debentures
are transferable in the same way as shares are in accordance with the conditions
endorsed on their back. The debenture itself consists of two parts:

3. Perpetual or Irredeemable Debentures

A debenture which contains no clause as to payment or which contains a clause
that it shall not be paid back is called a Perpetual or Irredeemable debenture.
Section 120 of the Companies Act provides that a condition contained in any
debenture is not invalid by reason only that thereby, the debentures are made
irredeemable or redeemable only on the happening of a contingency, however
remote, or on the expiration of a period, however long. It follows that debentures
can be made perpetual, i.e., the loan is repayable only on winding up, or after a
very long period of time.
4. Redeemable Debentures
Redeemable debentures are issued for a specified period of time. On the expiry of
that specified time the company has the right to pay back the debenture holders
and have its properties released from the mortgage or charge. Generally,
debentures are redeemable.

5. Convertible Debentures
A company may also issue convertible debentures, in which case an option is
given to the debentureholders to convert them into equity or preference share at
stated rates of exchange, after a certain period.

Debenture Certificate

Section 113 requires the debenture certificate to be issued within 3 months of the
allotment. In case of transfer, the same must be issued within 2 months after the
application for transfer. CLB may extend the aforesaid period but not beyond 9
months, if it is satisfied that it is not possible for the company to deliver the
certificate within the said period.

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Debenture trustee and trust deed:

The Companies (Amendment) Act, 2000 has added two new Sections, viz., 117A
and 117B relating to debentures trust-deed and debenture trustees. Section
117A stipulates that a trust deed for securing any issue of debentures shall be in
such form and shall be executed within such period as may be prescribed. It may
be noted that SEBI Guidelines, 2000 specify a period of six months from the
closure of the issue for listed companies.
Inspection and copy of trust deed — Sub-section (2) of Section 117A
empowers any member or debentureholder of the company to inspect the trust
deed and obtain copies of the same on payment of the prescribed amount.
Penalty for non-compliance — If inspection of trust deed or copy of the trust
deed is not made available to any member or debentureholder of a company, the
company and every officer of the company, who is in default, shall be punishable,
for each offence, with fine which may extend to Rupees five thousand hand for
each day during which the offence continues.

Appointment of Debenture Trustee (Section 117B)

A company before issue of a prospectus or a letter of offer to the public for
subscription of its debentures is required to fulfill the following conditions:
(i) to appoint one or more debenture trustee for such debentures;
(ii) To state on the face of the prospectus or letter of offer that the debenture
trustee or trustees have given their consent to be so appointed.
Restrictions on the appointment of a debenture trustee —A person cannot be
appointed as a debenture trustee, if he
(a) beneficially holds shares in the company;
(b) is beneficially entitled to moneys which are to be paid by the company to
the debenture trustee;
(c) Has entered into any guarantee in respect of principal debts secured by
the debentures or interest thereon.

Functions of the debenture trustee —Section 117B (2) lays down that,
subject to the provisions of the Act, the functions of the debenture trustee shall
generally be-
• to protect the interest of holders of debentures (including creation of
securities within the stipulated time); or
• To redress the grievances of holders of debentures effectively.

• to ensure that the assets of the company issuing debentures and each of the
guarantors are sufficient to discharge the principal amount of the
debentures at all times;
• to satisfy himself that the prospectus or letter of offer does not contain any

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 matter which is inconsistent with the terms of the debentures or with
the trust deed;
• to ensure that the company does not commit any breach of covenants
and provisions of the trust deed;
• to take reasonable steps to remedy any breach of the covenants of the
trust deed or the terms of issue of debentures;
• To take steps to call a meeting of holders of debentures as and when such
meeting is required to be held.
• To appoint a nominee director on the Board of directors of a company, in the
event of two consecutive defaults in payment of interest on debentures or default
in creation of security for debentures or redemption of debentures.
• To send communication to debenture-holders on a half-yearly basis in
respect of compliance of terms of issue by the company, as also defaults made
by the company, if any, in payment of interest or redemption amount and
action taken

Debenture Redemption Reserve (DRR) (Section 117C)

Section 117C, introduced by the Companies (Amendment) Act, 2000 provides
for creation of Debenture Redemption Reserve for the purpose of
redemption of debentures. It may, however, be noted that SEBI Guidelines have
since long stipulated such requirement. The provisions of Section 117C, in this
regard, are:

1. In respect of debentures issued after the commencement of the Amendment

Act, 2000 the company is required to create a debenture redemption reserve
for the redemption of such debentures.

2. The company shall credit the DRR adequate amounts from out of its profits
every year until such debentures are redeemed.
3. DRR shall be utilised by the company only for the purpose of redemption of
debentures
.
4. The company shall pay interest and redeem the debentures in accordance
with the terms and conditions of their issue.

5. Failure to redeem the debentures— if a company fails to redeem the

debentures on the due dates, any or all the debentureholders can make an
application to CLB. CLB, after hearing the parties concerned, may direct, by
order, the company to redeem the debentures forthwith by payment of principal
and interest due thereon.
6. Penalty for non-compliance— every officer of the company who is in default
shall be punishable with imprisonment which may extend to three years and
shall also be liable to fine which shall not be less than rupees five thousands

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 for every day during which the default continues.

Debenture issued by Tata- motors

Tata Motors Ltd, India's leading vehicles maker, has raised 42 billion rupees
($884 million) through an issue of non-convertible rupee debentures, the
company said.

The funds will be used to partly repay a $3 billion bridge loan Tata Motors had
raised last year to acquire marquee brands Jaguar and Land Rover,

It had already repaid $1.11 billion of the loan and the remainder is due for
repayment on June 2.

Citigroup and Tata Capital were the lead arrangers for the issue.

Denbenture issued by HDFC The country’s largest housing finance company,

Housing Development Finance Corporation (HDFC), today said it had received
approval of its directors to raise up to Rs 4,000 crore through qualified
institutional placement (QIP) of secured redeemable non-convertible debentures
(NCDs) and warrants.

Srei Infrastructure Finance plans to raise Rs 1,000 crore ($200 million) in the
current fiscal year through non convertible debentures