DEBENTURES [SECTION 71]

Definition and features of Debenture

 As per Section 2(30), 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:
 Provided that—
 the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934;
and
 such other instrument, as may be prescribed by the Central Government in
consultation with the Reserve Bank of India, issued by a company,
 shall not be treated as debenture.
 A debenture is the smallest unit of a sizeable amount of loan.
 When debentures are issued, the applicants are given certificates representing the
money they have lent to the company.
 A debenture certificate is issued by the company under its common seal, if any, or
under the signatures of two directors or a director and the company secretary, if he
has been appointed.
 The company pays periodic interest on the amount raised by issuing debentures till
they are fully redeemed.
 A debenture is generally pre-fixed with the rate of interest which the company
intends to pay.
 Voting rights are not available in case of debentures since Section 71 (2) clearly
states that no company shall issue any debentures carrying any voting rights.
 A debenture is in the nature of movable property which is transferable as per the
provisions contained in the Articles of the company issuing the debentures.
 A debenture may be secured or unsecured. In case of secured debentures, a charge is
created on the assets of the company in favour of debenture trustee.
 As per the terms of the issue of debentures, they may be redeemed (i.e. repaid) at the
end of full term or in installments, say yearly or bi-yearly or any other period like in
two installments.
 The terms of issue may also provide for conversion of debentures at maturity into
 equity shares at the option of the debenture holders.
 The debenture certificates are required to be delivered within a period of six months
from the date of allotment of debentures, unless the company is prohibited by any
provision of law or any order of Court, Tribunal or any other authority.

Type of Debentures

On the basis of
On the basis of On the basis of
convertibility in
security redeemability
shares

Convertible
(mandatorily or
Secured optionally, partially Redeemable
or fully)

Un-secured Irredeemable

Non-convertible

Issue of Secured Debentures: According to Section 71 (3), secured debentures may be

issued by a company subject to such terms and conditions as are prescribed in Rule 18 of
the Companies (Share Capital and Debentures) Rules, 2014.
According to Rule 18 (1), the company issuing secured debentures shall comply with the
following conditions:
1. Date of redemption of secured debentures shall not exceed ten years from the date
of issue.
Following classes of companies are permitted to issued secured debentures for a
period exceeding ten years but not exceeding thirty years:
 Companies engaged in setting up of infrastructure projects;
 Infrastructure Finance Companies;
 Infrastructure Debt Fund Non-Banking Financial Companies;
 Companies permitted by a Ministry or Department of the Central Government or by
Reserve Bank of India or by the National Housing Bank or by any other statutory
 body to issue debentures for a period exceeding ten tears.
2. Creation of Charge: Such an issue of debentures shall be secured by the creation of
a charge on the properties or assets of the company or its subsidiaries or its holding
company or its associates companies. Such assets or properties shall be of value
which is sufficient for the due repayment of the amount of debentures and interest
thereon.
3. Appointment of Debenture Trustee: The company shall appoint a debenture trustee
before the issue of prospectus or letter of offer for subscription of its debentures.
Further, not later than sixty days after the allotment of the debentures, it shall execute
a debenture trust deed53 to protect the interest of the debenture holders.
4. Security: The security for the debentures by way of a charge or mortgage shall be
created by the company in favour of the debenture trustee.
5. Creation of Debenture Redemption Reserve (DRR) Account: Section 71 requires
that where debentures are issued by a company under section 71, the company shall
create a debenture redemption reserve account out of the profits of the company
available for payment of dividend and the amount credited to such account shall not
be utilised by the company except for the redemption of debentures. Rule 18 (7)
specifies that the company shall comply with the requirements with regard to
Debenture Redemption Reserve (DRR) and investment or deposit of sum in respect
of debentures maturing during the year ending on the 31st day of March of next year,
in accordance with the conditions given below:-
(a) Debenture Redemption Reserve shall be created out of profits of the company
available for payment of dividend;
(b) The limits with respect to adequacy of Debenture Redemption Reserve and
Investment or deposits, as the case may be.
(c) A company shall on or before the 30th day of April in each year, in respect of
debentures issued by such a company, invest or deposit, as the case may be, a
sum which shall not be less than fifteen percent., of the amount of its debentures
maturing during the year, ending on the 31st day of March of the next year in any
one or more methods of investments or deposits as provided:
i. in deposits with any scheduled bank, free from any charge or lien;
ii. in unencumbered securities of the Central Government or any State Government;
iii. in unencumbered securities mentioned in sub-clause (a) to (d) and (ee) of section
20 of the Indian Trusts Act, 1882;
 iv. in unencumbered bonds issued by any other company which is notified under
sub-clause (f) of section 20 of the Indian trusts Act, 1882:
(d) the amount credited to Debenture Redemption Reserve shall not be utilized by
the company except for the purpose of redemption of debentures.
6. Limitation on the Issue of Prospectus/Offer/Invitation to the public: According to
Section 71 (5), no company shall issue a prospectus or make an offer or invitation to
the public or to its members exceeding five hundred for the subscription of its
debentures, unless the company has, before such issue or offer, appointed one or
more debenture trustees and the conditions governing the appointment of such
trustees shall be such as are prescribed in Rule 18 (2) of the Companies (Share
Capital and Debentures) Rules, 2014.
The company shall appoint debenture trustees under sub-section (5) of section 71,
after complying with the following conditions, namely:
(a) the names of the debenture trustees shall be stated in letter of offer inviting
subscription for debentures and also in all the subsequent notices or other
communications sent to the debenture holders;
(b) before the appointment of debenture trustee or trustees, a written consent shall
be obtained from such debenture trustee or trustees proposed to be appointed and
a statement to that effect shall appear in the letter of offer issued for inviting the
subscription of the debentures;
(c) A person shall not be appointed as a debenture trustee, if he—
i. beneficially holds shares in the company;
ii. is a promoter, director or key managerial personnel or any other officer or an
employee of the company or its holding, subsidiary or associate company;
iii. is beneficially entitled to moneys which are to be paid by the company otherwise
than as remuneration payable to the debenture trustee;
iv. is indebted to the company, or its subsidiary or its holding or associate company
or a subsidiary of such holding company;
v. has furnished any guarantee in respect of the principal debts secured by the
debentures or interest thereon;
vi. has any pecuniary relationship with the company amounting to two per cent or
more of its gross turnover or total income or fifty lakh rupees or such higher
amount as may be prescribed, whichever is lower, during the two immediately
 preceding financial years or during the current financial year;
vii. is relative of any promoter or any person who is in the employment of the
company as a director or key managerial personnel.
(d) the Board may fill any casual vacancy in the office of the trustee but while any
such vacancy continues, the remaining trustee or trustees, if any, may act. It is
provided that where such vacancy is caused by the resignation of the debenture
trustee, the vacancy shall only be filled with the written consent of the majority
of the debenture holders.
(e) any debenture trustee may be removed from office before the expiry of his term
only if it is approved by the holders of not less than three fourth in value of the
debentures outstanding, at their meeting.
7. Debenture Trustee to protect Interest of Debenture Holders: Section 71 (6) requires
that a debenture trustee shall take steps to protect the interests of the debenture-
holders and redress their grievances in accordance with such rules as may be
prescribed.
In order to protect the interest of debenture holders, Rule 18 (4) provides for the
convening of the meeting of debenture-holders. Accordingly, the meeting of all the
debenture holders shall be convened by the debenture trustee on:
(a) requisition in writing signed by debenture holders holding at least one- tenth in
value of the debentures for the time being outstanding;
(b) the happening of any event, which constitutes a breach, default or which in the
opinion of the debenture trustees affects the interest of the debenture holders.
8. Liability of Debenture Trustee: According to Section 71 (7), any provision contained
in a trust deed for securing the issue of debentures, or in any contract with the
debenture-holders secured by a trust deed, shall be void in so far as it would have the
effect of exempting a trustee thereof from, or indemnifying him against, any liability
for breach of trust, where he fails to show the degree of care and due diligence
required of him as a trustee, having regard to the provisions of the trust deed
conferring on him any power, authority or discretion.
It is provided that the liability of the debenture trustee shall be subject to such
exemptions as may be agreed upon by a majority of debenture-holders holding not
less than three-fourths in value of the total debentures at a meeting held for the
purpose.
9. Filing of Petition before Tribunal by Debenture Trustee: Section 71 (9) states that
 where at any time the debenture trustee comes to a conclusion that the assets of the
company are insufficient or are likely to become insufficient to discharge the
principal amount as and when it becomes due, the debenture trustee may file a
petition before the Tribunal and the Tribunal may, after hearing the company and
any other person interested in the matter, by order, impose such restrictions on the
incurring of any further liabilities by the company as the Tribunal may consider
necessary in the interests of the debenture-holders.
10. Order of Tribunal on Failure to Redeem Debentures/Pay Interest: According to
Section 71 (10), where a company fails to redeem the debentures on the date of their
maturity or fails to pay interest on the debentures when it is due, the Tribunal may,
on the application of any or all of the debenture-holders, or debenture trustee and,
after hearing the parties concerned, direct, by order, the company to redeem the
debentures forthwith on payment of principal and interest due thereon.
11. Default in compliance with Order of the Tribunal: According to Section 71 (11), if
any default is made in complying with the order of the Tribunal under this section,
every officer of the company who is in default shall be punishable with imprisonment
for a term which may extend to three years or with fine which shall not be less than
two lakh rupees but which may extend to five lakh rupees, or with both.