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Question
Explain briefly the procedure for issue of debentures.
Solution
Section 2 (30) of the Companies Act, 2013 define debenture as "debenture" includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.
Following is the procedure to be followed by a company issuing debentures -
1. Pass resolution in Board Meeting: In the Board Meeting following resolution will
have to be passed :
i) amount and type of debentures to be issued and the terms and conditions for issue.
ii) approve prospectus or offer letter or letter of offer.
iii) approve appointment of Debenture Trustees and get their written consent.
iv) authorize Board to create charge on assets of the company.
v) call Extra-ordinary General Meeting if the Board's borrowing powers need to be
increased.
vi) authorizes Board to open a separate bank account for receiving money from applicants
2. Hold Extra-ordinary General Meeting (EGM) : If the borrowing powers of the Board is to be increased, EGM must be held to get the shareholders' approval through a Special Resolution.
3. Filing with Registrar of Companies: Secretary has to file the Special resolution and copy of Prospectus, offer letter / Letter of offer with Registrar of Companies within 30 days of the Board Meeting.
4. Obtain Credit Rating: Company gets its debentures rated by one or more Credit Rating Agencies. The ratings must be mentioned in the prospectus/offer letter/Letter of the offer.
5. Enter into underwriting agreement: Company enters into an underwriting agreement for underwriting its debenture issue.
6. Issue prospectus / letter of offer/offer letter: Company issues prospectus, if it is inviting the public to buy its debentures. An offer Letter is issued if a company makes a private placement and Letter of an offer for Rights Issue.
7. Open Separate Bank Account: The company opens a separate bank account in a scheduled Bank to receive the money from the applicants.
8. Receiving application money: Subscribers will submit their application along with the required amount to the specified bank within the time period mentioned in the prospectus or letter of offer / Offer Letter
9. Hold Board Meeting: After the issue closes, a Board Meeting is held to decide and approve allotment of debentures. Board also approves the creation of charges on the company's assets.
10. Issue of Debenture certificate: The allotment procedure has to be completed within 60 days from the receipt of application money. The company has to issue a Debenture certificate within 6 months of allotment of debentures.
11. Make entries in Register of Debenture holders: Secretary has to make entries in the Register of Debenture holders within 7 days after the Board approval of allotment. However, if debentures are issued in Demat form, the company does not maintain the Register of Debenture holders.
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RELATED QUESTIONS
Select the correct answer from the option given below and rewrite the statement:
The details of allotment of Debentures must be entered in ___________.
Select the correct answer from the option given below and rewrite the statement:
Procedure for allotment of Debenture should be completed within ___________ from the date of receipt of applications.
Write a word or a term or a phrase which can substitute the following statement.
Period within which debenture certificate must be issued by a company.
Write a word or a term or a phrase which can substitute the following statement.
Authority which has power to issue debentures.
State whether the following statement is or false.
Debentures holders are paid interest.
State whether the following statement is or false.
Debenture trustees are appointed to protect the interest of shareholders.
State whether the following statement is True or False.
Debenture certificate is issued within 6 six months of allotment of debentures.
State whether the following statement is true or false.
After allotment of Debentures, names of Debenture holders are entered in the Register of Members.
Complete the sentence.
To stop a company from incurring further liabilities, the Debenture trustee can approach ____________.
Complete the sentence.
Return on investment on debenture is called ________.
Answer in one sentence:
When should a company appoint a credit rating agency?
Correct the underlined word and rewrite the following sentence:
Procedure for allotment of debentures should be completed within 90 days from date of receipt of application.
Arrange in proper order.
- Issue debenture certificate
- Issue prospectus
- Open bank Account
Study the following case/situation and express your opinion.
Rose limited company proposes to issue debenture to the public to raise funds. After discussions, the board of directors have decided to issue secured, redeemable, non-convertible debentures with a tenure of ten years. Please advise the board on the following matters:
Can the tenure of debentures be less than ten years?
Study the following case/situation and express your opinion.
DDS financial plans to raise 10 crores by issuing secured non-convertible debentures. However, as per the Articles of Association, the board of directors have authority only to raise up to 5 crores. They are also considering whether to go for private placement or make public offer. Please advise them on the following:
Is the proposed issue within the borrowing powers of the board?
Study the following case/situation and express your opinion.
| Violet Ltd. company plans to raise 10 crores by issuing debentures. The Board of Directors has some queries. Please advise them on the following: |
- Can the company issue unsecured debentures?
- Can they issue irredeemable debentures?
- As the company is offering debentures to its members, can such debentures have normal voting rights?
Elaborate on the process for the issue of debentures.
