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SP - HSC - TOPIC - DEBENTURES

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Published in: Business Studies
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What is Debenture, Conditions, Types, Redemption?

Vivek K / Mumbai

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Qualification: CA (ICAI - 2017)

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  1. cessoN NO.4 - Issue OF QI. STATE THE PROVISION FOR ISSUE OF DEBENTURES? 1. 2. 3. 4. 5. 6. 7. A joint stock company can issue debentures at any time . Debentures can be issued by public company as well as by private company. Private company after securing certificate of incorporation can issue debentures. Public company has to obtain Trading Certificate for the issue of Debentures. As per section 292(1) the board of Directors has the power to issue debentures. The power must be exercised by means of resolution passed in the Board Meeting. A company cannot borrow money exceeding the aggregate of the paid capital of the company and its free reserves. As pre section 293 (1) the Act empowers Board of Directors to raise excess money with the consent of members in general meeting. The Articles of Association should specify the maximum amount that company can borrow. According to the companies Act, company cannot issue debentures carrying voting rights. Debentures can be issued at par or at premium or even at a discount. They may be issued through prospectus or private arrangement. Companies (amendment) Act, 2000 prohibits issue of unsecured debentures. Now companies can issue only secured debentures. EXPLAIN THE SECRETARIAL PROCEDURE REGARDING ISSUE OF DEBENTURES The Procedure of issuing of debentures is as follows: - 1. Resolution by Directors: -As empowered by Articles, Board of Directors will pass a resolution in the board meeting. Authorizing the issue of debentures. The resolution contain detail about Number of debentures to be issued. Amount of Face value. 'Rate of Interest. Period after which interest is payable. Terms of redemptions.
  2. 2. 3. 4. 5. 6. 7. 8. 9. Resolution By shareholders (if required): -The approval of shareholders is required, if the total borrowing of the company exceeds the aggregate of paid up capital and free reserves. For this the company has to convene a general meeting to pass special resolution to issue debentures which exceeds the limit. Consent of SEBI: The Company has to obtain consent of SEBI, if the issue of debentures exceed Rs. One Crore or more. Approval of Stock Exchange: The issue of debentures must be listed with at least one recognized stock exchange. For this, approval of stock exchange is required to be taken before prospectus is issued to the public. Credit rating: -As per the SEBI guidelines of 2000, the company has to get its debentures rated by two recognized Credit Rating agencies such as CRISIL CARE. It should be disclosed (show) in prospectus. Registration of Trust deed: - Before issue of prospectus to the public, company is required to appoint Debenture Trustees, with their due consent. A company executes a Trust Deed with trustees. By conveying companyees property to the trustees, the debentures are secured through" Trust Deedee Issue of Prospectus: After complying with all formalities noted above, the company secretary arranges for issue of prospectus to general public. Wide publicity is given through print media and electronic media by issuing advertisement. Receipt of Application: -The Company must make proper arrangement to receive application along with application money, through companyees bankers. The application money must be deposited in a scheduled bank in a separate account. Allotment of Debentures: - The allotment of debentures is carried out by Board of Directors. For this a suitable resolution is passed in the Board Meeting. 10. Issue of Debenture Certificate: - The Company has to issue the debenture certificate to the investors. Nowadays, the debentures are credited directly to the Demat account of the investors. 11. Register and Index of Debenture holders: - The secretary should make proper entries in the register of debenture-holders. Also, a suitable index must be prepared in respect of debenture holders, if the number of debenture holders exceeds 50. Q3 PROCEDURES FOR CONVERSION OF DEBENTURES INTO SHARES? Meaning: - Joint Stock Companies can issue either non-convertible or convertible debentures. SEBI (Disclosure and Investor Protection) Guidelines 2000 has given necessary provisions relating to convertible and non-convertible debentures. Section 81(3) of the Companies Act permits companies to issue Convertible debentures. Convertible debentures are converted into equity shares on maturity. The conversion date and rate of conversion is stated in the prospectus. Convertible debentures are not redeemed by the company.
  3. Convertible debentures are further classified as (A) Full Convertible Debentures, (B) Partly convertible Debentures. Procedure for conversion of Debentures into Shares: 1. 2. 3. 4. 5. 6. 4. 1. 2. 3. Board Resolution: -A resolution for conversion is approved in the board meeting. The shareholders as well as debenture holders" approval is taken for conversion. A special resolution is passed to that effect. A copy of special resolution is filed with the Registrar of companies within 30 days of its passing. Letter of Option: -A letter of option is sent to debenture holders and one copy of the same is filed with SEBI. The secretary then verifies the consent sent by debenture holders for conversion. Allotment of Shares: -Debenture is converted into equity shares. A notice of conversion is sent and debenture holders are asked to return debenture certificates. Secretary carries out allotment of shares to debenture holders in due course. Changes in Register of Charges: -After allotment of shares, necessary changes are to be made in the Register of Charges. Company has to cancel the charges against assets which were created at the time of issue of debentures. Entry in Register of Members: -Shares Certificate is issued to holders and their names are entered in the Register of Members. Filing of Returns of Allotment: -A Return of allotment is filed with the Register of Companies within 30 days of allotment. PROCEDURE FOR REDEMPTION OF DEBENTURES? Meaning: -As the debenture capital is borrowed capital it has to be paid back. The repayment of debenture amount to debenture holder is called as redemption of debentures. Every company is required to create a 'Debenture redemption reserve' for the purpose of redemption of debentures. Board Meeting: -A board meeting is held to finalise procedure for redemption of debentures. A resolution is approved in the meeting to redeem the debentures. Intimation about Redemption to debenture holder: -Secretary has to send letter to debenture holders giving detail of redemption. He informs them to surrender debenture certificate. Refund: -A secretary has to inform bankers to carry out necessary steps to repay to debenture holders.
  4. 4. 5. 6. Changes in Register of Debenture holders: -After completion of redemption procedure, secretary notes down the details of redemption in Register of Debenture holders. Changes in the Register of Charges: -The charges created on assets in favour of debenture holders are cancelled and register of charges is suitably modified. Intimation to Registrar of Companies: -Company informs the Registrar about the details of redemption of debentures. Q METHOD OF REDEMPTION? 1. REDEMPTION AFTER FIXED PERIOD 2 REDEMPTION BY ANNUAL INSTALMENTS 3 REDEMPTION BY DRAW METHOD 4 REDEMPTION BY OWN PURCHASE METHOD 5 REDEMPTION BY FRESH ISSUE METHOD

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