How To Issue Debentures and Bonds

How to issue debentures and bonds ?
by :
DR. T.K. JAIN
AFTERSCHO☺OL
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5 DECEMBER 09 www.afterschool.tk 1
Why debenture ?
They are fixed interest bearing instruments,
and therefore they reduce overall cost of
capital of the company. Suppose a company
has cost of equity of 30%, it issues debenture,
which costs 15% , the company is able to
reduce the cost of overall capital and thus its
market value will increase. But debentures /
loans should be upto certain limits, otherwise,
the cost of equity will also go up and there will
be questions about viability of the company.
What is a debenture ?
Sec. 2 (12) : it includes debenture stock, bonds

or other securities of a company whether
constituting a charge on the company's assets
or not.
What is yankee bond?
A bond issued in the US market by the foreign

banks and companies. As per Securities Act
(USA)
1933 : these bonds must be registered with
SEC before they can be sold. They are issued
in tranches and each offering can be as large as
100 Crore $.
Zero coupon bond ?
A debt security that doesnt pay interest, but it

is issued at deep discount but it is redeemed at
its face value. It is also called Accrual or Deep
discount bond.
Types of debentures ?
Redeemable or irredeemable (irrideemable

debentures are not allowed in India).
Convertible (into equity) or non-convertible
secured or non-secured
registered or bearer
What is debenture trust deed?
(sec. 117A)
As per SEBI (debenture trustees) regulations

1993 and SEBI Guidelines 2000, a company
which issues debenture will have to appoint
trustees of debentures. These trustees will sign
an agreement when debentures are issued.
These trustees will safeguard the interests of
debenture holders.
Duties of debenture trustees?
(a) to ensure that the assets of the company issuing debentures and each of
the guarantors are sufficient to discharge the principal amount at all times;
(b) to satisfy himself that the prospectus or the letter of offer does not
contain any matter which is inconsistent with the terms of the debentures or
with the trust deed;
(c) to ensure that the company does not commit any breach of covenants
and provisions of the trust deed;
(d) to take such reasonable steps to remedy any breach of the covenants of
the trust deed or the terms of issue of debentures;
(e) to take steps to call a meeting of holders of debentures as and when such
meeting is required to be held.
Contents of debenture trust deed?
Rights of debenture holders

rights and responsibilities of company
matters regarding terms of appointment of
trustees
rights of trustees
other details.
Debenture redemption reserve
(sec. 117C)
It is compulsory for company to create

debenture redemption reserve.
Who can be debenture trustee?
A scheduled bank
an insurance company
a public financial institution
a body corporate
Who cant be debenture trustee?
A shareholder
a guarantor of the company
Time limit for creating debenture
trust deed?
3 months of issue of debenture
How to redeem debenture?
Lump sum payment method

drawing of lots method
purchase in open market
convert to equity
redemption out of capital
out of profit
What is a charge ?
It is a security provided to secure loan
Types of charge ?
Fixed charge – when underlying assets remain

same. Example : building, land etc.
floating charge – where underlying assets keep
chaning example : stock, debtors
How to register a charge?
As per sec. 125, a company has to register a

charge with ROC (registrar of companies) in
30 days of creation of charge.
When will a floating charge
crystalise (convert into fixed
charge )?
1. winding up / liquidation
2. when a company ceases to carry on business
3. when the debenture holders take some step
against company for this
4. when there is some event specifying such as
per agreement
Register of charge ?
As per sec. 143, every company will have to

keep a register of charge at its registered office,
which can be inspected by any member /
creditor without any fees. (sec. 144) and by
others on payment of fees of Rs. 10 during
business hours
What type of charges have to be
registered ?
Charge for debenture
floating charge
charge on uncalled up share capital
charge on calls made but not paid
charge on ship , movable property (other than a pledge )
charge on immovable property
a charge on book debt
a charge on goodwill, patent, licence etc. (sec. 125(4)
What will happen if you dont
register charge?
Charge is valid against company, but void

against company
creditors can still receive the payment against
them.
Security becomes void – but it doesnt affect
obligations of the company.
Modification of charge ? Sec. 135
Once you modify any condition in charge, you

have to register it in 30 days in form 8 with
ROC.
What is mortgage ?
Sec. 58 of Transfer of property act 1882 :

interest in immovable property for securing
payment
Types of mortgage
Usufructuary mortgage
english mortgage
simple mortgage
anomalous mortgage
mortgage by deposit of title
Difference between mortgage,
pledge and lien hypothecation ?
Mortgage is about immovable property

hypothecation is about movable property like
car, truck etc.
Pledge is about stock or such things which can
change. Lien is also to secure loan – in lien the
property is given to the lender (creditor)
What is ECB?
When an Indian company borrows from other

countries, it is called ECB (external
commercial borrowing). The RBI gives
policies regarding ECB. It includes buyer /
supplier credit, commercial loans, and other
loans from foreign markets. It also include
floating rate notes, convertible bonds from
foreign banks.
Ceiling limit on public deposit
that can be taken .. rule 3(2)
Deposits against debentures / shares etc. From

shareholders : 10% of paid up capital +
reserves
govt. Company can get upto 35% of paid up
capital + reserves
from other public for other companies : max.
25% of paid up capital + reserves
Advertisement (rule 4)
Proper advertisement in specified format must

be given in english + vernacular newspapers
and a copy of this must be given to Registrar
duly signed by director
Statement in lieu of advertisement
Rule : 4A : when you dont issue advertisement,

file this.
Register of deposit (rule 7)
Maintain proper register of deposits /

debentures etc. – with details like name,
amount, address, particulars of the depositor
Declarations about debentures &
Deposits ....
Whenever a company goes for IPO / FPO

(follow on public issue – 2nd public issue ) , or
any other issue, it will have to submit a
declaration that it has not defaulted in
redemption of debentures / deposits
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How To Issue Debentures and Bonds

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How to issue debentures and bonds ?

Sec. 2 (12) : it includes debenture stock, bonds

A bond issued in the US market by the foreign

A debt security that doesnt pay interest, but it

Redeemable or irredeemable (irrideemable

As per SEBI (debenture trustees) regulations

Rights of debenture holders

It is compulsory for company to create

3 months of issue of debenture

Lump sum payment method

It is a security provided to secure loan

Fixed charge – when underlying assets remain

As per sec. 125, a company has to register a

As per sec. 143, every company will have to

Charge is valid against company, but void

Once you modify any condition in charge, you

Sec. 58 of Transfer of property act 1882 :

Mortgage is about immovable property

When an Indian company borrows from other

Deposits against debentures / shares etc. From

Proper advertisement in specified format must

Rule : 4A : when you dont issue advertisement,

Maintain proper register of deposits /

Whenever a company goes for IPO / FPO

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