Question

Explain the secretarial procedure regarding issue of debentures.

Answer 1

Meaning: -

When a company wants to borrow long term finance then issuing debentures is the most convenient method. Because, debentures can be repaid after a long period such as 10 years, 20 years, etc. the term debenture originates from a Latin word ‘debate’ meaning ‘to owe’. In simple terms, a debenture is an instrument of credit issued by a company to acknowledge its debt/loan to debenture holder up to a certain sum of money under certain terms and conditions. It is in the form of a document known as the Debenture Certificate.

The Procedure for issuing of debentures is as follows:

1. Resolution by Directors: -
   As empowered by Articles, the Board of Directors will pass a resolution in the board meeting. Authorizing the issue of debentures. The resolution contains detail about 
   

• A number of debentures to be issued.
• Amount of Face value.
• Rate of Interest.
• The period after which interest is payable.
• Terms of redemptions.

1. 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 a special resolution to issue debentures which exceed the limit.
2. Consent of SEBI: 
   The Company has to obtain the consent of SEBI if the issue of debentures exceed Rs. One Crore or more.
3. 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 the prospectus is issued to the public.

5. 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 the prospectus.

6. Filing of the prospectus: -
   The Company is required to prepare and file a prospectus with a registrar, when debentures are issued to the public. However, ‘Statement in Lieu of Prospectus’ is to be filed when debentures are issued through Private Placement.

7. Registration of Trust deed: -
   Before the issue of a prospectus to the public, the company is required to appoint Debenture Trustees, with their due consent. A company executes a Trust Deed with trustees. By conveying the company’s property to the trustees, the debentures are secured through’ Trust Deed’.

8. Issue of Prospectus:
   After complying with all formalities noted above, the company secretary arranges for the issue of a prospectus to the general public. Wide publicity is given through print media and electronic media by issuing advertisements.

9.  Receipt of Application: -
   The Company must make proper arrangements to receive application along with with application money, though the company’s bankers. The application money must be deposited in a scheduled bank in a separate account.

10. Allotment of Debentures: -
    The allotment of debentures is carried out by the Board of Directors. For this, a suitable resolution is passed in the Board Meeting.

11. 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.

12. 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.