What is a debenture?
A debenture is a document that evidences a debt of the company. Section 2(30) includes debenture stock, bonds, and any other instrument evidencing a debt, whether or not it creates a charge on the company’s assets.
No. Section 71 says a company shall not issue debentures carrying voting rights.
What does the holder hold?
The holder is a creditor for the amount and the interest the instrument promises. In a winding up that debt is paid before equity capital. The instrument gives no vote at a general meeting. Interest is the company’s expense. It is not a dividend. A CCPS is a preference share that converts into equity. It is not a debenture.
Which kinds does the Act allow?
A debenture may be secured by a charge, or unsecured. It may be convertible into shares, wholly or partly, at the time of redemption, if the shareholders have passed the special resolution section 71 requires. A non-convertible debenture stays debt until it is repaid. A secured debenture is issued so that it is redeemed within 10 years of issue. The rules allow up to 30 years for an infrastructure company and the finance companies they name. The company does not issue a secured debenture with no redemption date.
How is it issued?
The board approves the issue. A public offer needs a prospectus, a debenture trustee, and the disclosures the offer requires. A private placement follows section 42: a special resolution, the private-placement offer, allotment within 60 days of receiving the money, and PAS-3 within 15 days of allotment. An offer of non-convertible debentures only to qualified institutional buyers can be made on a board resolution, within the limit the section states. A secured issue creates a charge, and the charge is registered with the Registrar. A listed debenture also follows the listing regulations. This page does not set an interest rate.
Who keeps a redemption reserve?
An unlisted company, other than a non-banking financial company or a housing finance company registered with its regulator, and other than the financial institutions the rules exclude, keeps a debenture redemption reserve of 10 percent of the value of the outstanding debentures. The reserve comes out of profits available for dividend and is used to redeem the debentures. Listed companies, and those registered non-banking and housing-finance companies, do not create that reserve for a public issue or a private placement. A company that must keep the reserve also deposits, by 30 April, at least 15 percent of the debentures maturing during the year that ends the following 31 March. That deposit is used only to repay those maturing debentures.
Frequently asked questions
Four questions cover voting, redemption, the reserve, and a preference share.
Does a debenture carry a vote?
No. Section 71 says a company shall not issue debentures carrying voting rights.
Can a company issue an irredeemable debenture?
A secured debenture is redeemed within 10 years, or within 30 years for the infrastructure and finance companies the rules name. It is not left outstanding with no redemption date.
Does every company create a debenture redemption reserve?
No. Listed companies, and non-banking and housing-finance companies registered with their regulators, do not create that reserve. An unlisted company outside those classes keeps a reserve of 10 percent of the outstanding debentures.
Is a convertible debenture a preference share?
No. It is debt until it converts. A compulsory convertible preference share is equity-side capital and is a different instrument.
Sources
A debenture is section 2(30). Issue and voting are section 71. The redemption period and the debenture redemption reserve are in the Companies (Share Capital and Debentures) Rules, 2014.