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    Book - Company Law & Practices-320

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    Book - Company Law & Practices-320

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    Book - Company Law & Practices-320

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    EP-CL&P Debt Instruments – Concepts

    Pari Passu Clause in case of Debentures


    Debentures are usually issued in a series with a pari passu clause and it follows that they would be on an equal
    footing as to security and should the security be enforced, the amount realised shall be divided pro-rata, i.e.,
    they are to be discharged rateably. In the event of deficiency of assets, they will abate proportionately. The
    expression ‘pari passu’ implies with equal step, equally treated, at the same rate, or at par with. When it is said
    that existing debentures shall be issued at pari passu clause, it implies that no difference will be made between
    the old and new debentures.
    If the words pari passu are not used, the debentures will be payable according to the date of issue, and if they
    are all issued on the same day, they will be payable accordingly to their numerical order. However, a company
    cannot issue a new series of debentures so as to rank pari passu with prior series, unless the power to do so is
    expressly reserved and contained in the debentures of the previous series.

    Debenture Stock
    A company, instead of issuing debentures, each in respect of separate and distinct debt, may raise one aggregate
    loan fund or composite stock known as ‘debenture stock’. Accordingly, a debenture stock is a borrowed capital
    consolidated into one mass for the sake of convenience. Instead of each lender having a separate bond or
    mortgage, he has a certificate entitling him to a certain sum being a portion of one large loan. It is generally
    secured by a trust deed. As in the case of shares, a person may subscribe for, or transfer any amount even
    a fraction amount. Debenture stock is the indebtedness itself, and the debenture stock certificate furnishes
    evidence of the title or interest of the holder in the indebtedness. Debenture is the document which furnishes
    evidence of the debt. Debenture stock must be fully paid, while debenture may or may not be fully paid.
    ISSUE AND REDEMPTION OF DEBT SECURITIES
     Section 71(1) of the Act states that a company may issue debentures with an option to convert such
    debentures into shares, either wholly or partly at the time of redemption. Further, the issue of debentures
    with an option to convert such debentures into shares, wholly or partly, shall be approved by a special
    resolution passed at a general meeting.
     No company shall issue any debentures carrying any voting rights [Section 71(2)].
     Section 71(3) read with Rule 18(1) of Companies (Share Capital and Debentures) Rules, 2014 provides
    that the secured debentures may be issued only when the following conditions are compiled with: -
    l Redemption Clause - The date of redemption of Secured Debentures shall not exceed ten years
    from the date of issue.
    The following classes of Companies may issue secured debentures for a period exceeding 10
    years but not exceeding 30 years,
    (i) Companies engaged in setting up of infrastructure projects;
    (ii) Infrastructure Finance Companies as defined in clause (viia) of sub direction (1) of direction 2
    of Non-Banking Financial (Non-deposit accepting or holding) Companies Prudential Norms
    (Reserve Bank) Directions, 2007;
    (iii) Infrastructure Debt Fund Non-Banking Financial Companies’ as defined in clause (b) of
    direction 3 of Infrastructure Debt Fund Non-Banking Financial Companies (Reserve Bank)
    Directions, 2011;
    (iv) 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 authority to issue
    debentures for a period exceeding ten years.
    l Appointment of Debenture Trustee & execution of Debenture Trust deed - The company shall
    appoint the debenture trustee before the issue of prospectus or letter of offer for subscription of its

    280

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