Question

Briefly explain the provisions of Companies Act, 2013 for issue of debentures.

Answer 1

Following are some of the provisions of the Act which a company has to comply, while issuing debentures:

1. No voting rights: A company cannot issue debentures with voting rights. Debenture holders are creditors of the company, and so they do not have any voting rights except in matters affecting them.
2. Types of Debentures : A company can issue secured or unsecured debentures and fully or partly convertible debentures or non-convertible debentures. To issue convertible debentures, a Special Resolution has to be passed in the General Meeting. All debentures are redeemable in nature.
3. Payment of interest and redemption: A company shall redeem the debentures and pay interest as per the terms and conditions of their issue.
4. Debenture Certificate: Company has to issue a Debenture certificate to the debenture holders within 6 months of allotment of Debentures.
5. Create Debenture Redemption Reserve: Company has to create a Debenture Redemption Reserve account out of profits of the company available for payment of dividends. This money can be used only for the redemption of debentures. As per Companies (Share Capital and Debentures) Amendment Rules 2019, MCA has removed the Debenture Redemption Reserve requirement for listed companies, NBFCs and Housing Finance Companies.
6. Appointment of Debenture Trustees: If the company issues prospectus or invites more than 500 people, (either to Public or its Member) company has to appoint one or more Debenture Trustees. Debenture trustees protect the interest of the debenture holders. The company has to appoint trustees by entering into a contract with them called as Debenture Trust Deed.
7. Debentures Trustee can approach NCLT: Debenture Trustees have to redress the grievances of debenture holders. If the company defaults in repaying the principal amount, on maturity or defaults in paying interest there on, the Debenture Trustees can approach the National Company Law Tribunal for redressal. NCLT can direct a defaulting company to repay the principal amount or interest.
8. Impose restrictions: When the Debenture Trustee is of the opinion that the assets of the company are insufficient or likely to become insufficient to redeem the principal amount of debentures, it may approach the NCLT. NCLT can order a company to restrict incurring further liabilities to protect the interests of the debenture holders.
9. Punishment for contravention of provisions of the Companies Act: If the company fails to comply with any provisions of the Act, then the company and its officers shall be liable to pay a fine or imprisonment or both as prescribed in the Act.