INTRODUCTION Debenture includes debenture stock, bonds and any other securities of a company

whether constituting a charge on the assets of a company or not as defined in the Companies Act. This is
an inclusive definition and amounts to borrowing of monies from the holders of debentures on such
terms and conditions subject to which the debentures have been issued. Basically it is a document or
certificate signed by the authorized officers of a company acknowledging money lent and guaranteeing
repayment with interest and creating security on the assets of the company for due performance of its
obligation. This is a debt instrument and is the commonest method of raising loan capital, as part of
project financing. Debentures may be redeemable as envisaged in the Companies Act or mandatorily
convertible wholly into the equity shares of a company as envisaged under FEMA. While the articles of a
company should contain an enabling provision for issue of debentures and creation of security therefor
by the Board, the quantum of such issue should be adequately covered by a borrowing resolution of its
shareholders under section 293(l)(d) of the Companies Act,1956 (the Act).

ISSUE OF DEBENTURES AND CREATION OF SECURITY A company which issues debentures is under an
obligation to create security therefor pursuant to section 117A of the Act by executing trust deed. The
need for executing a trust deed will arise when a company wants to issue a prospectus or letter of offer
to the public for securing subscription to its debentures and for this purpose should appoint one or
more debenture trustees. The above documents should state that the debenture trustees have
consented to be appointed as such as required by section 117B of the Act. Thus a debenture trustee
enjoys a unique position of being an independent entity unconnected with the issuer of security but
appointed to protect the interest of holders of debentures.

QUALIFICATION FOR APPOINTMENT OF DEBENTURE TRUSTEE All and sundry cannot be appointed as
trustees. A person holding shares beneficially in the issuer company or beneficially entitled to receive
moneys from that company and has provided any guarantee in respect of principal debts secured by the
debentures or interest thereon cannot be appointed as a trustee, as specified in the Act. SEBI
(Debenture Trustee) Regulations, 1993 additionally provide that no entity shall be entitled to act as
debenture trustee unless at is either a scheduled bank carrying on commercial activity or a public
financial institution within the meaning of section 4A of the Act or an insurance company, or a body
corporate. It is also necessary that such an entity should have capital adequacy of net worth of one
crore of rupees and have been licensed by SEBI to act as a debenture trustee.

FUNCTIONAL ROLE OF DEBENTURE TRUSTEE The Debenture Trustee is an intermediary between the
issuer of debentures and the holders of debentures. Accordingly the main responsibility of debenture
trustee is to protect the interest *Past President, The ICSI e-mail : prahlada.rao@foxmandallittle.com
Articles All about Debentures : An Appraisal of holders of debentures including creation of security by
the company issuing the debentures and to redress their grievances. (i) Companies Act Under the
Companies Act, 1956 the debenture trustee has the following responsibilities : (a) To ensure that the
assets of the company issuing debentures and each of the guarantors are sufficient to discharge the
principal amount at all times. (b) To satisfy that the prospectus or the letter of offer does not contain
any matter which is inconsistent with the terms of debentures or with the trust deed. (c) To ensure that
the company does not commit any breach of covenants and provisions of the trust deed. (d) To take
such reasonable steps to remedy any breach of the covenants of the trust deed or the terms of issue of
the debentures. (e) To take steps to call a meeting of holders of debentures as and when such meeting is
required to be held. Needless to say that the aforesaid responsibilities envisaged in Section 117B(3) of
the Act are intended to protect the interest of the debenture holders. One of the aforesaid
requirements relate to adequacy of security so that in the event of failure of issuer of security to redeem
the debentures,(which is an event of default) the Debenture Trustee should enforce the security and
pay off the debenture holders by disposing off the secured assets.

SEBI Regulations Regulation 15 of SEBI (Debenture Trustees) Regulations, 1993 prescribes the following
duties of the Debenture Trustee : (a) Call for periodical reports from the body corporate, i.e., issuer of
debentures. (b) Take possession of trust property in accordance with the provisions of the trust deed. (c)
Enforce security in the interest of the debenture holders. (d) 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 save and except those which are specifically agreed with the debenture trustee. (e)
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. (f) To 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. (g) To 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. (h) Inform the Board immediately of any breach
of trust deed or provision of any law. (i) Appoint a nominee director on the board of the body corporate
in the event of : - (i) two consecutive defaults in payment of interest to the debenture holders; or (ii)
default in creation of security for debentures, or (iii) default in redemption of debentures. (j) No
debenture trustee shall relinquish its assignments as debenture trustee in respect of the debenture
issue of any body corporate, unless and until another debenture trustee is appointed in its place by the
body corporate. Rule 17A of the aforesaid Regulation provides that every debenture trustee should
appoint a compliance officer and he shall be responsible for monitoring the compliance of the Act, rules
and regulations, notifications, etc., issued by the Board or the Central Government for redressal of
investors grievances. Thus a Debenture Trustee occupies a pivotal position of trust and confidence
between the company which issues debentures and the debenture holders who subscribe for the
debentures. CONTENTS OF THE DEBENTURE TRUSTEE AGREEMENT Schedule IV to SEBI Regulations lists
some of the clauses which are to be included in the Debenture Trustee Agreement. They are ; (a)
Preamble, (b) Description of the Instrument, (c) Details of charged securities (i) nature of charge, (ii)
examination of title, (iii) rank of the charge, i.e., whether first, second, or pari passu charge, etc. (iv)
charging of future assets, (v) time limit for creation of charge, (vi) minimum security cover required, (vii)
valuation of security, (viii) circumstances in which security becomes enforceable, (ix) method and
preservation of secured property etc. (d) Events of default. (e) Rights of Debenture Trustee. (f)
Obligations of the body corporate (i.e., Issuer of debentures). Apart from the above, the Agreement will
have to include the following provisions : (i) Definition and Interpretation, (ii) Appointment of Debenture
trustee and its powers,

WHO CAN APPOINT DEBENTURE TRUSTEE ? 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. This is one of the powers conferred on the
Debenture Trustee by the SEBI Regulations. Effective use of this power is possible if this power is
included in the Debenture Trustee Agreement and a suitable power of attorney is executed by the issuer
of debentures in favor of Debenture Trustee. This document has to be executed as a trust deed and not
as a Mortgage deed or bond.

WHAT IF THE DEBENTURE HOLDER IS A NON-RESIDENT? These days large real estate development
projects are financed by international banking institutions under the Special Economic Zone (SEZ)
scheme by subscribing to mandatorily convertible debentures, as required under the FEMA. In thisevent
if the debenture holder is a non- resident, he cannot hold the mortgaged property as FEMA regulation
prohibits a nonresident holding an immovable property in India. The definition of transfer in section
2(ze) of FEMA includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of
transfer of right ,title, possession or lien. However, a non-resident debenture holder requires back up
security till his debentures are converted into the equity shares of the Indian company. This can be
achieved by appointing a Debenture Trustee so that he will be able to hold the secured property for the
benefit of non-resident debenture holder. This does not attract FEMA provisions as the secured
property is held by an Indian entity on behalf of an Indian company. Even the sale of secured property
by the debenture Trustee, in the event of default by the Indian company will not attract FEMA
provisions as the transaction will take place in India without the involvement of non-resident debenture
holder. However remittance of sale proceeds to the non-resident debenture holder involves FEMA
scanner and will have to be routed through the authorized dealer in foreign exchange as there is no
automatic capital convertibility.

STAMPING REQUIREMENTS In the matter of issue of debentures, there is Mortgage Deed (dealt with in
Article 40) and Debenture (dealt with in Article 27) of the Indian Stamp Act. While the former document
sets out the terms and conditions subject to which debentures have been issued including security, the
latter document provides for transfer of debentures as a marketable security. There are various forms
for creation of security by way of mortgage. It may be with possession or without possession of property
with reference to which mortgage has been created or proposed to be created. One of the simplest
ways of creating mortgage is by deposit of title deeds in respect of secured asset and this has been dealt
with in Article 6 of the Indian Stamp Act. Where the debt is repayable on demand or more than three
months from the date of the instrument evidencing the agreement, the stamp duty payable is the same
as on the bill of exchange dealt in Article 13(b) of the said Act. Accordingly, upto rupees one thousand, it
is five rupees and for every additional one thousand or part thereof, the duty payable is rupees five,
where it is payable more than one year after date. The amount of duty payable will have to be worked
on the total value of debentures. Article 27 deals with stamp duty payable on the transfer of debentures
as a marketable security by way of endorsement or by separate instrument of transfer. Rates of stamp
duty are given in the Article. However, in the matter of issue of debenture certificate, there is an
exemption. This exemption is applicable if the debenture certificate is issued by an incorporated
company in terms of registered mortgage deed, duly stamped in respect of full amount of debentures
and the debenture certificate is issued

DEBENTURE CERTIFICATE The debenture certificate stands on a different footing. Before issue of
certificate, the company will have to create a charge on the assets of the company by filing the required
forms with the ROC. The certificate of charge will have to be reproduced on the back of the certificate as
also major terms and conditions subject to which debentures have been issued. Section 113 of the
Companies Act provides for issue of debenture certificate within three months from the date of
allotment of debentures. However, the Company Law Board (this power is being shifted to Central Govt)
may extend the period to a further period not exceeding nine months if it is satisfied that the company
is not in a position to deliver the certificate within the aforesaid period of three months. Delay in
creation of security may be one of the reasons for seeking extension of time.

DEBENTURE REDEMPTION RESERVE Section 117C of the Companies Act requires that every company
issuing debentures should create DRR for the purpose of redemption of debentures to which adequate
amounts should be credited from the profits of the company until debentures are redeemed. This is a
mandatory provision. SEBI regulations alsorequire companies issuing debentures to provide for DRR as
required under the Companies Act. Even where debentures are compulsorily convertible into the equity
shares of the debenture issuing company, as in the case of FEMA, creation of DRR is unavoidable till the
date of conversion. However, after conversion of debentures, the amount in the DRR may be
transferred to general reserve or in such other manner as the Board thinks fit and proper. The amount
credited to DRR cannot be utilized except for the redemption of debentures.

UNSECURED DEBENTURES Companies may also issue unsecured/subordinated debt

instruments/obligations and these are not considered as public deposits under section 58A of the
Companies Act. However, such instruments have to be subscribed by qualified institutional investors or
others who have given positive consent for subscribing to such unsecured/subordinated debt
instruments. In the case of companies issuing debt instruments like debentures having maturity of less
than 18 months, there is a facility of creating a charge on the assets of the company, instead of having to
create mortgage and appoint Debenture Trustee for its assets. However, where no charge is created as
aforesaid, the issuer company is required to ensure compliance with the provisions of Companies
(Acceptance of Deposits ) Rules as such unsecured debentures/bonds are treated as deposits as
provided in Chapter X of SEBI (Disclosure& Investor Protection) Guidelines, 2000. Sections 117 to 123 of
the Companies Act, 1956 provide for special provisions regarding debentures. These provisions are also
applicable to unlisted public companies and private limited companies. The provisions of the articles of
the company should also be kept in view. The manufacturing and Infrastructure companies can avail of
lower percentage of DRR as the DCA circular does not make any distinction between listed and unlisted
companies in its circulars referred to above and the relaxation is also applicable for privately placed
debentures by private companies.

CONCLUSION Issue of Debentures, whether redeemable or convertible involves compliance with the
substantive and procedural aspects of law. Documentation is equally important .The benefit of raising
loan capital lies in the fact that it does not disturb equity structure of the company and consequently the
existing management. However, the success of a debenture issue, be it private or public issue depends,
to a large extent, on the goodwill and rapport built up by the company with the investing public.
Another aspect of the matter is the protection of interest of debenture holders. This is sought to be
achieved by an independent Debenture Trustee who is required to be appointed by listed companies in
regard to public issue or further issue of capital as the number of debenture holders are considerably
large. Creation of DRR which is a statutory obligation is intended to provide liquid resource built out of
profits of a company for redemption of debentures.