Redemption Of Debentures

INTRODUCTION

 The word debenture has been derived from the Latin word which means borrow.[1] Debenture is an instrument under which the company gets the power of raising the loan capital.[2] Debenture is like a certificate of a loan which acts as the evidence of the fact that the company is liable to pay the specific amount with the interest and that person becomes the part of a company’s capital structure.[3] Debentures contains a contract of you payment of principal after a specific period of time. Debentures have been stated under Section 2(12)[4] of the Companies Act, 2013.[5] Debentures include debentures stocks bonds or any other instrument of a company which contains a dept.[6]

Under Section 71 (2) of the Companies Act, 2013[7] it has been stated that no company can issue debentures which can carry any voting rights.[8] Under the rule (1) of Companies (Share Capital and Debentures) Rules, 2014, it has been stated that the company cannot issue secured debentures unless following conditions are fulfilled.[9] The rate of redemption cannot exceed 10 years from the date of issue.[10] The company which has been engaged in setting up of infrastructure projects can issue security debentures crossing 10 years but cannot exceed 30 years.[11] The issue of debentures should be secured by creation of a charged.[12] The security of debentures by the way of charge should be treated in the favour of debenture trustee.

The debentures can be issued by the company under the meeting of board of directors under the provisions of Section 179 (3) of the Companies Act, 2013.[13] The provisions of Section 71 of the Companies Act, 2013 are related to the issuance of debentures along with the penalties.

CREATION OF DEBENTURE REDEMPTION RESERVE ACCOUNT

For the purpose of redemption of debentures the company has the right to create debenture redemption reserve account.[14] The debenture redemption reserve should be created out of the profits of the company available for the payment of dividend.[15] For creating the debenture redemption reserve account there must be at least 50% of amount which should be raised to the debenture issue before the debenture Redemption commences.[16]

Debenture redemption reserve should be created by every company on or before 30th April every year so that there should be investment. If there is a case of convertible debentures then the debenture redemption reserve shall be created in respect of non convertible portion of debentures. The amount which is credited to the debenture redemption reserve must not be utilised by the company itself except for the purpose of redemption of debentures. Company has to pay the interest to return the debentures in accordance under the terms and conditions of the issue.

 

[1] Debentures under Companies Act, 2013 – Law & Procedure for Issue, (2015), https://www.linkedin.com/pulse/debentures-under-companies-act-2013-law-procedure-issue-kumar (last visited Apr 18, 2017).

[2] Id.

[3] CS M. Kurthalanathan, Debentures under Companies Act, 2013 & Rules 2014Debentures- under Sec.71 of the Companies Act,2013 & Companies (Share Capital and Debentures) Rules, 2014 (2014), http://taxguru.in/company-law/debentures-companies-act-2013-rules-2014.html (last visited Apr 18, 2017).

[4] Debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not.

[5] The Companies Act, 2013 The Companies Act, 2013 & The Companies Rules, 2014 The Companies Rules, 2014 Notification of Sections and Rules Notification of Sections and Rules under Companies Act, 2013 under Companies Act, 2013 , , http://cii.in/WebCMS/Upload/CompaniesActRepresentation.pdf (last visited Apr 9, 2017).

[6] Companies Act, 2013 Key highlights and analysis, https://www.pwc.in/assets/pdfs/publications/2013/companies-act-2013-key-highlights-and-analysis.pdf (last visited Apr 9, 2017).

[7] No company shall issue any debentures carrying any voting rights.

[8] Chandra Gopalan (2007); Company Law in Singapore 3rd Edition; McGraw-Hill Education (Asia).

[9] Convertible Debenture, , http://www.investopedia.com/terms/c/convertibledebenture.asp (last visited Apr 9, 2017).

[10] Abdul Khaliq Mohammed, Shareholder, Debenture Holders and their Rights, https://www.academia.edu/12317751/Shareholder_Debenture_Holders_and_their_Rights_in_CA_2006 (last visited Apr 9, 2017).

[11] Debenture, , http://www.investopedia.com/terms/d/debenture.asp (last visited Apr 9, 2017).

[12] Vinod Kumar, Who are the Debenture Holders of a Company? (2011), http://www.svtuition.org/2011/04/who-are-debenture-holders-of-company.html (last visited Apr 9, 2017).

[13] Section 179 (3) of the Companies Act, 2013 states-

The Board of Directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board, namely:—

  1. to make calls on shareholders in respect of money unpaid on their shares;
  2. to authorise buy-back of securities under section 68;
  3. to issue securities, including debentures, whether in or outside India;
  4. to borrow monies;
  5. to invest the funds of the company;
  6. to grant loans or give guarantee or provide security in respect of loans;
  7. to approve financial statement and the Board’s report;
  8. to diversify the business of the company;
  9. to approve amalgamation, merger or reconstruction;
  10. to take over a company or acquire a controlling or substantial stake in another company;
  11. any other matter which may be prescribed:

 

[14] Revision in the Rules on creation of debenture redemption reserve, (2014), https://assets.kpmg.com/content/dam/kpmg/pdf/2014/07/FirstNotes_19May14.pdf (last visited Apr 18, 2017).

[15] New debenture redemption reserve provisions: Will they promote or demote the bond market?, (2013), http://www.moneylife.in/article/new-debenture-redemption-reserve-provisions-will-they-promote-or-demote-the-bond-market/31499.html (last visited Apr 18, 2017).

[16] Provisions relating to creation of Debenture Redemption Reserve stand changed , (2016), http://indiacp.blogspot.in/2014/05/Companies-Share-Capital-and-Debentures-Rules-2014.html (last visited Apr 18, 2017).

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