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FAQs

The laws regulating the issue of debentures are section 71 of the Companies Act 2013 and Rule 18 of the Companies (Share Capital and Debenture) Regulation 2014.
Discount on the issue of debenture is considered as a Capital Loss to the company. Hence, it should be shown on the Assets Side of the Balance Sheet as the "Miscellaneous Expenditure” as a Fictitious Asset.
The different types of Debentures are Secured Debenture, Unsecured Debenture, Redeemable Debenture, Irredeemable Debenture, Convertible Debentures, Non-Convertible Debentures, Specific Coupon Rates Debentures, Zero-Coupon Rate Debentures, Registered Debentures, Bearer Debentures, First Debentures, and Second Debentures.
No, the debentures do not carry voting rights.
The Debentures represent the debt of the company.
Yes, the Interest Rate is fixed on Debentures.
Yes, the Debentures can carry a zero rate of interest.
Yes, Debentures bear a Common Seal of the Company.
The interest charged on Debentures is a Tax-deductible expense.
No, debenture holders are not the owner of the company.
The debenture holders are given priority over shareholders at the time of Winding up.
The different ways to issue debentures in India are the Oversubscription of Shares, Issue of Debentures for Cash, Issue of Debentures for the Consideration other than Cash, and Issue of Debentures as Collateral.
The steps involved in the process for issue of debentures are Hold a Board Meeting, Call an EGM, File MGT-14 with ROC, Maximum Limit, Investment Size, Letter of Offer, File Offer Letter with ROC, Receive Money from Investors, Convene a Board Meeting, File CHG-9, Restriction on using Application Money, File Return of Allotment, and File the Corporate Action.
Yes, there is a need to create a DRR (Debenture Redemption Reserve) account out of the profits available for the payment of dividends.
The company needs to file MGT-14 with the ROC (Registrar of Company) within 30 days of passing Special Resolution in the EGM.
The company needs to restrict the offer letter to a maximum of 200 investors in any financial year.
The debentures on the basis of security are Secured and Unsecured Debentures.
The debentures on the basis of time are Redeemable and Irremediable Debenture.
The debentures on the basis of Convertibility are Convertible Debentures and Non-Convertible Debentures.
The debentures on the basis of Coupon Rate are Specific Coupon Rate Debentures and Zero-coupon Rate Debentures.
The debentures on the basis of Registration are Registered Debentures and Bearer Debentures.
The debentures on the basis of Priority are First Debentures and Second Debentures.
The debentures that are repayable by the company after a specified period are known as Redeemable Debentures.
The debentures that carry a charge on the assets are known as secured debentures.
The debentures that are repayable during the existence of the company are known as Irredeemable Debentures.
The debentures that do not carry any charge on the assets are known as unsecured debentures.
The debentures which are convertible into the equity shares after the expiry of a specified period are known as Convertible Debentures.
The debentures that cannot be converted into equity shares are known as non-convertible debentures.
When a company issues debenture with a specific rate of interest, they are called Coupon Rate Debentures.
The debentures that do not carry a Specific Rate of Interest are known as Zero Coupon Rate Debentures.
Registered Debentures means a company issuing debentures by recording the name of the holder in the made.
When a company transfers debentures by mere delivery, they are known as Bearer Debentures.
The Debentures that are given priority in repayment are called the First Debentures.
The Debentures that are repaid after the first debentures are known as Second Debentures.
It means the issue price of a debenture is below its face value.
When a company issues its debenture at a price more than its face value, it is known as the Issue of Debenture at Premium.
When the issue price and face value of a debenture are equal, it is known as the issue of Debenture at Par.
Yes, debentures can act as collateral security to the lenders.
The term “collateral” means the debenture given or the assets pledged as a security to acquire a loan.
When instead of paying the cash, a company issues its debentures for consideration apart from cash for the assets bought from the vendor.
Yes, companies can Issue Debenture at Par for Consideration other than Cash.
Yes, companies can Issue Debenture at Premium for Consideration other than Cash.
Yes, companies can Issue Debenture at Discount for Consideration other than Cash.
Over Subscription of Debenture means when a company invites the public to subscribe to its debenture and the applications received are more than the number of debentures offered.
The Return on Debentures is known as Interest.
The payment of interest is a charge. It means the company needs to pay the interest even if it incurs losses also.
Debentures Holders can convert their debentures into shares.
No, Debenture holders do not have a Voting Right.
Debenture Holders are the Creditors of the Company.
Rule 18 of the Companies (Share Capital and Debenture) Regulation 2014 governs the Issue of Debentures.
The stamp duty payable on the Issue of Debenture is payable at 0.05%, which is less than the amount of stamp duty payable on the shareholder loan.

FAQs

A debenture is an instrument of debt executed by the company acknowledging its obligation to repay the sum at a specified rate and also carrying an interest. It is one of the methods of raising the loan capital of the company. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital.
A debenture trustee means a trustee of a trust deed for securing any issue of debentures of a body corporate
To act as debenture trustee, the entity should either be a scheduled bank carrying on commercial activity, a public financial institution, an insurance company, or a body corporate. The entity should be registered with SEBI to act as a debenture trustee.

For registration as a Debenture Trustee, an applicant is required to pay a non-refundable application fee of Rs. 50,000/- by way of demand draft drawn in favour of ‘Securities and Exchange Board of India’, payable at Mumbai. The application in Form A along with additional information Sheet (AIS) (Form A and additional information sheet available on SEBI Website : http://www.sebi.gov.in/sebiweb/home/detail/31043/no/Debenture-Trustee-How-to-apply shall be submitted to the Division Chief at the below mentioned address :

Market Intermediaries Regulation And Supervision Department - 5
Securities and Exchange Board of India
SEBI Bhavan, 3rd Floor A Wing,
Plot No. C4-A, ‘G’ Block,
Bandra-Kurla Complex,
Bandra (E), Mumbai - 400 051.
Fees for the initial as well as permanent registration is to be paid by the applicant. The break-up of fee is given below:

Type Fees prescribed in Debenture Trustee Regulations Tenure (years) Initial Registration ` 20,00,000/- 5
Permanent Registration ` 9,00,000/- After completion of initial period of 5 years.
The certificate of initial registration remains valid for five years. The Debenture Trustee has to apply for permanent registration certificate to SEBI, 3 months before the expiry of the validity of the certificate, if it wishes to continue as a registered Debenture Trustee. The applicant has to pay a sum of ` 9,00,000/- every 3 years subsequent to the grant of permanent registration to keep the registration in force.
  • ♦ Call for periodical reports from the body corporate, i.e., issuer of debentures.
  • ♦ Take possession of trust property in accordance with the provisions of the trust deed.
  • ♦ Force security in the interest of the debenture holders.
  • ♦ Ensure on a continuous basis that the property charged to the debenture is available and adequate at all times to discharge the interest and principal amount payable in respect of the debentures and that such property is free from any other encumbrances except those which are specifically agreed with the debenture trustee.
  • ♦ Exercise due diligence to ensure compliance by the body corporate with the provisions of the Companies Act, the listing agreement of the stock exchange or the trust deed.
  • ♦ Take appropriate measures for protecting the interest of the debenture holders as soon as any breach of the trust deed or law comes to his notice.
  • ♦ Ascertain that the debentures have been converted or redeemed in accordance with the provisions and conditions under which they are offered to the debenture holders.
  • ♦ Inform the Board immediately of any breach of trust deed or provision of any law.
  • ♦ Appoint a nominee director on the board of the body corporate when required.

When can a nominee director be appointed?

  • ♦ A nominee director can be appointed in the event of:
    • ♦ Two consecutive defaults in payment of interest to the debenture holders; or
    • ♦ Default in creation of security for debentures; or
    • ♦ Default in redemption of debentures.

Yes, a debenture issue can be transferred.

A debenture trustee can relinquish its assignments in respect of the debenture issue of any body corporate only when another debenture trustee is appointed in its place by the body corporate.

What are the contents of the debenture trustee agreement?

Debenture Trustee Agreement should include the following:

  • ♦ Preamble
  • ♦ Description of the Instrument
  • ♦ Details of charged securities
  • ♦ Nature of charge
  • ♦ Examination of title
  • ♦ Rank of the charge, i.e., whether first, second, or pari passu charge, etc.
  • ♦ Charging of future assets
  • ♦ Time limit for creation of charge
  • ♦ Minimum security cover required
  • ♦ Valuation of security
  • ♦ Circumstances in which security becomes enforceable
  • ♦ Method and preservation of secured property etc.
  • ♦ Events of default
  • ♦ Rights of Debenture Trustee
  • ♦ Obligations of the body corporate (i.e., Issuer of debentures). Apart from the above, the Agreement will have to include the following provisions:
    • ♦ Definition and Interpretation
    • ♦ Appointment of Debenture trustee and its powers
    • ♦ Remuneration of Debenture Trustee
    • ♦ Appointment of debenture Trustee as Attorney
    • ♦ Negative pledge i.e. not to create additional encumbrances on the secured asset
    • ♦ Description of Events of Default, which may arise due to Non-payment to debenture holders, breach of any undertaking, avoidance or repudiation, etc.
    • ♦ Notice of exercise of trustee powers
    • ♦ Indemnity of trustee
    • ♦ Retirement of trustee & appointment of new trustee
    • ♦ Reimbursement of expenses incurred by the trustee
    • ♦ General covenants etc.
Creation of security means mortgaging the property in favor of Debenture Trustee for the benefit of debenture holders. This is an incidence of ownership of property and creation of security has to be done by the owner of the property.
However, the debenture holders are beneficiaries and they have no access to mortgaged property. The Debenture Trustee holds the secured property on behalf of issuer of security and for benefit of debenture holders. In the event of default by the issuer of security, the Debenture Trustee will have the power and authority to bring the secured property to sale following the procedure in the Transfer of Property Act and the proceeds of sale will have to be applied to redeem the debentures.
As per the provisions of companies act, appointment of debenture trustee is mandatory. However, issue of debentures / bonds with maturity of 18 months or less are exempt from the requirement of appointment of Trustee.

  • ♦In case of debenture / bonds with maturity beyond 18 months, a trustee or an agent, by whatever name called shall be appointed to take care of the interest of debenture / bond holders irrespective of whether or not the debentures / bonds are secured.
  • ♦Where the debentures / bonds are unsecured, these are treated as fixed deposits, if received from individual investors
In India, the issuer pays to the Debenture Trustee.
In India, Debenture Trustees are regulated by SEBI. The SEBI (Debenture Trustees) Regulations, 1993 govern the Debenture Trustees and provide for eligibility criteria for registration of Debenture Trustees, monitoring and review, registration, Code of Conduct, procedure of action in case of defaults, avoidance of conflict of interest and inspection of Debenture Trustees by SEBI, amongst other things.
Public issues and issues proposed to be listed are covered under the said regulations.
A debenture trustee cannot act for any issue of debentures of its associate or if it has lent and the loan is not yet fully repaid or is proposing to lend money to the body corporate:
It is the obligation of body corporate to create Debenture Redemption Reserve as per SEBI DIP guidelines and SEBI (Debenture Trustees) Regulations, 1993. DT has to ensure that the issuer furnishes an auditor’s certificate to it for the same.