Issue of Debentures by a Company

A debenture is a legal document that represents a secure means by which a creditor can lend money to the debtor. In this article, we look at the procedure for issuing of debentures by a company registered in India.

Debentures

According to Section 2 (30) of the Companies Act, 2013, “Debenture” includes debenture stock, bonds or any other instrument of a company that is evidence of a debt, whether it has or not constituted a charge on the assets. Debenture can be classified as:

Secured Debenture
Unsecured Debenture

Conditions for Issue of Debenture

The following conditions must be satisfied for issuing a debenture:

No company will issue any debentures that carry any voting rights.
No company will issue a prospectus or make an offer or invitation to the public or to its members in excess of five hundred for the subscription of its debentures, unless the company has, previous to such issue or offer, selected one or more debenture trustees and the prescribed conditions that govern the appointment of such trustees.
An issue of debenture for more than 500 members or any number of public that is subject to clarification from government without the creation of a debenture trust is forbidden.
A debenture trustee will take steps to protect the interests of the debenture holders and remedy their grievances.
Any provision of trust deed or contract that is protected by trust deed, exempting a trustee or indemnifying him against any liability for violation of trust will be void.
If any default is made in compliance with the order of the Tribunal under this section, every officer of the company who is in default will be punishable with imprisonment for a term which may extend to a period of 3 years or with fine which will not be less than Rs 2 lakh but which may extend to Rs five lakh or with both.

Procedure to Issue Debentures

Call Board Meeting

Call and hold Board meeting and make a decision which types of the debenture will be issued by the Company. In the Board meeting pass resolutions for Approval of the following:

Offer letter for private placement in Form No. PAS – 4 and Application Forms
Approval of Form No. PAS – 5
Sanction of Debenture Trustee Agreement and appointment of a Debenture Trustee
Appointment of an expert for approval of increase of borrowing powers, if required
To authorize for creation of charge on the assets of the company
Agree to the Debenture Subscription Agreement
To fix day, date and time for the extraordinary general meeting of shareholders.

Prepare the Following Documents

Based on the decisions of the Board Meeting, prepare the following documents and issue notice for extraordinary general meeting:

Debenture Subscription Agreement
Offer Letter for private placement in Form No. PAS – 4 and Application Forms
Records of a private placement offer in Form No. PAS – 5
Debenture Trustee Agreement
Mortgage Agreement for creation of charge on assets of the company

Finally, issue notices of extraordinary general meeting together with the explanatory statement.

Extraordinary General Meeting

Hold extraordinary general meeting and enable special resolution to issue convertible secured debentures and augment borrowing powers of the company and to sanction the Board to create charge on the company assets.

Prepare and File Documents

On approval of the debenture issue, prepare and file the following documents

File Form No. PAS – 4 and PAS – 5 in Form No. GNL – 2 with the Registrar of Companies (ROC).
File Offer Letter in Form No. MGT – 14 with the Registrar of the Companies (ROC).
File copy of Board resolutions, Special Resolution, Debenture Subscription Agreement, Debenture Trustee Agreement and so on Form No. MGT – 14 with the Registrar of Companies.
File Form No. PAS – 3 related to return of allocation with the Registrar of Companies (ROC) after making allocation of debentures.
File Form No CHG – 9 for the creation of charge on assets related to the Company.