COMPANY LAW

UNIT-8 DEBENTURES

SYNOPSIS
Meaning
Definition
Kinds of debentures
Debenture holder
Remedies of a debenture holder
Debenture trust deed

DEBENTURES MEANING AND DEFINITION

 Debentures are a debt instrument used by companies and government to issue the loan.
 The loan is issued to corporates based on their reputation at a fixed rate of interest.
 Debentures are also known as a bond which serves as an IOU between issuers and purchaser.
 Companies use debentures when they need to borrow the money at a fixed rate of interest for
its expansion
 The word ‘debenture’ itself is a derivation of the Latin word ‘debere’ which means to borrow
or loan.
 Debentures are written instruments of debt that companies issue under their common seal.
They are similar to a loan certificate.
 Debentures are issued to the public as a contract of repayment of money borrowed from
them.
 These debentures are for a fixed period and a fixed interest rate that can be payable yearly or
half yearly.
 Debentures are also offered to the public at large, like equity shares. Debentures are actually
the most common way for large companies to borrow money.

TYPES OF DEBENTURES
There are various forms of debentures which a company can issue depending upon its requirement.
Debentures can be issued based on various factors i.e. performance, security, priority, convertibility
and record.
1. Based on Performance:- Based on the performance, there are two types of debentures which
are issued i.e.
Redeemable Debentures: Redeemable debentures are the debentures where the date of redemption
of the debentures are specifically mentioned in the debenture certificate issued, where on such date,
the company is legally bound to return the principal amount to the debenture holder.
Irredeemable Debentures: Irredeemable debentures continue for perpetuity and unlike redeemable
debentures, there is no fixed date on which the company needs to pay the debenture holders. It
becomes redeemable only when the company goes into liquidation.
 2. Based on security
Secured Debentures When the debentures are issued by way of creation of charge over the assets of
the company, then such debentures are called as secured debentures. The charge created over the
debentures may be fixed or maybe floating. In accordance with the provisions of the Companies
Act, 2013, such charge created has to be registered with the Registrar within 30 days of such
creation.
Unsecured Debentures: Unlike secured debentures, unsecured debentures are issued by the company
without creation of charge over the assets of the company. In other words, these debentures do not
offer any protection to the debenture holder in case the company is unable to pay the principal
amount on the due date.
3. Based on Priority
First Mortgaged Debentures: Basically, the distinction of debentures based on priority can be called
as a subcategory of the secured debentures. First Mortgaged Debentures are those debentures which
has first preference over all the other debentures issued by the company. Such preference is claimed
at the time of liquidation of the company when the assets of the company are distributed among the
credit holders.
Second Mortgaged Debentures: Second Mortgage Debenture, as the name suggests, has second
preference over the assets of the company at the time of liquidation after the first mortgaged
debentures. Only after the first mortgaged debenture holders are satisfied, will the second
mortgaged debenture holders can claim their principal amount from the company at the time of
liquidation.
4. Based on Convertibility
Fully Convertible Debentures: Fully convertible debenture holders have the right to convert their
debentures into equity shares of the company at a future date, at the option of the debenture holders.
The conversion ratio, the rights of the debenture holders post-conversion and the trigger date for
conversion are defined at the time of issue of these debentures.
Partially Convertible Debentures: Partially convertible debentures can be divided into two parts.
The first part being the debentures which are convertible to equity shares of the company and the
second part being non-convertible debentures which shall redeem at the expiry of its tenure. An
option is given to the debenture holder to partially convert its debt into shares of the company.
Partially convertible debentures are also deemed as optionally convertible debentures.
Non-Convertible Debentures: Debentures which do not have an option to get converted into equity
shares of the company are called non-convertible debentures. These debentures get redeemed at the
end of the maturity period.
5. Based on Record
Registered Debenture: In case of registered debenture, the name, address, number of debentures and
other details pertaining to holding are entered by the company in the register of debentures. In such
cases, the transfer of debentures from one debenture holder to another debenture holder is recorded
in the register of debenture holders as well as register of transfer.
Unregistered Debentures: Unregistered debentures are also called bearer debentures. Unlike
registered debentures, the company does not maintain the records of such debentures and the
principal amount and the interest is paid to the bearer of the instrument as against the name written
over such instrument. These debentures are easily transferrable in the market.

DEBENTURE HOLDER AND HIS REMEDIES

Debenture-holders are the subscribers to debentures. Debentures are part of loan, so a debenture
holder is only a creditor of the company. Debenture holders have no rights to vote in the company's
general meetings of shareholders, but they may have separate meetings or votes e.g. on changes to
the rights attached to the debentures.
Rights and remedies of secured debenture holder:-
(i) They can file a suit against the company for the principal as well as for the interest.
(ii) They can file an application to the court regarding compulsory dissolution of the company.
(iii) If the company is under the process of winding up, the can claim their principal.
(iv) These debenture holders can file a suit against the companies for its compulsory dissolution
through the debenture trustee.
(v) They can file a suit against the company for the sale of property.
(vi) They can get an injunction from the court to restrict the right of the company to sell its property
for redemption of the debenture.
(vii) If the trustee is so authorized, the debenture holder may appoint liquidator through the trustee
and get the charge sold for the purpose of repayment.

DEBENTURE TRUST DEED

A debenture trust deed is an instrument that a company executes in favour of a debenture trustee,
thereby appointing them and defining their role and duties to protect the interest of debenture
holders before debentures are offered for public subscription.
A company before issuing a prospectus or a letter of offer to the public for the subscription of its
debentures is required to appoint one or more debenture trustees for such debentures to look after
the interest of debenture holders.
A company has to execute a debenture trust deed within sixty days from the date of allotment of
debentures.
As per the circular issued by the SEBI, The company will have to create a charge as specified in the
offer document in favour of the debenture trustee. It contains terms and conditions of debentures as
well as rights of debenture holders.
The terms of the creation of such security have to be mentioned in the trust deed. The format of the
debenture trust deed is given in Form No. SH.12.
As per Section 71(5) of the Companies Act, 2013 when a company wants to issue debentures to
more than 500 members then the company has to execute a debenture trust deed appointing trustees
to protect the interests of debenture holders.