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Submitted to:- Compiled by:-

Mrs. Alamdeep Kaur Mohit Munjaal
Roll No. 197/11
10th Semester, UILS,
Panjab University,

I am equally grateful to my teacher Mrs. Alamdeep Kaur. She gave me moral support and
guided me in different matters regarding the topic. She had been very kind and patient while
suggesting me the outlines of this project and correcting my doubts. I thank her for all support.
Last but not the least, I would like to thank my parents and my partner who helped me a lot in
gathering different information, collecting data and guiding me from time to time in making this
project. Despite of my parent's busy schedules; they gave me different ideas in making this
project unique. I and my friend put a team effort to complete this project.

Thanking you

Table of Contents

I. Introduction to Debentures ................................................................................. 3

I. A Definitions of Debenture.............................................................................. 3
I. B Characteristics of Debentures ....................................................................... 4
II. Types of Debentures.......................................................................................... 5
III. Contents, Stock and Issue of Debentures .......................................................... 6
III. A Contents of Debentures ............................................................................ 6
III. B Debenture Stock ........................................................................................ 6
III. C Issue of Debentures ................................................................................... 7
IV. Debenture Trust Deed ...................................................................................... 7
IV. (A) Debenture Trustees ................................................................................. 8
IV. B Liability of Company to Create security and Debenture Redemption
Reserve ............................................................................................................... 8
IV. C Reissue of Redeemed Debentures ............................................................. 8
V. Register of Debenture Holders [Section 88 (5)]................................................. 9
VI. Remedies available to Debenture-holders against non-payment ..................... 10
VI. A Appointment of Receiver ........................................................................ 11
VI. B Manager .................................................................................................. 12
VII. Guidelines for Issue of Debentures by Public Sector Companies ................. 133
VIII. Bibliography...17

I. Introduction to Debentures
Debenture is most important instrument and method of raising the loan capital by the company.
A debenture is like a certificate of loan or a loan bond evidencing the fact that the company is
liable to pay a specified amount with interest and although the money raised by the debentures
becomes a part of the company's capital structure, it does not become share capital.

Section 2 (30) of the Companies Act, 2013 define inclusively debenture as "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.

The power to issue debentures can be exercised on behalf of the Company as a meeting of the
Board under the provisions of Section 179 (3) of the Companies Act, 2013. Further Section 71 of
the Companies Act, 2013 deals with the provisions relating to the issuance of debentures along
with the penalties for no- compliance of the same.

Section 71 of the Act enables that a company may issue debentures with an option to convert
such debentures into shares, either wholly or partly at the time of redemption. 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. The section prohibits issue of
debentures carrying voting rights.

I. A Definitions of Debenture

According to Topham, debenture is a document given by a company as an evidence of a

debt to the holder usually arising out of a loan and most commonly secured by a charge.1

In LaxmanBharamji v. Emperor2 the Bombay High Court observed that debentures normally
indicate the security against the loan taken by the company and contain the conditions of
repayment, date, rate of interest payable to the holder. They may even create a charge on the

Tophams Company Law (12th Ed.) 168.
AIR 1946 Bom. 18.

companys property but it is not always necessarily so. Briefly speaking, debentures are the
acknowledgement of debt, the promise to return it.

I. B Characteristics of Debentures
1. Debentures are generally issued in series but a single debenture may be issued in case of a
sole-lender of the company.3

2. Debenture is usually in the form of a certificate issued under the seal of the company.

3. Debenture is an acknowledgement of indebtedness. It usually provides for the payment of

a specified sum at a specified date. However, a company may issue a perpetual debenture
wherein no specific date of repayment may be stated. Further, Section 71 of the Companies
Act, 2013 provides that perpetual debentures are not invalid simply because they are made
irredeemable or redeemable only on the happening of a contingency, however remote or on
the expiration of a period however long.4

4. Debenture generally creates a charge on the undertaking of the company or on some of its
assets. This is, however, not an essential characteristic and a debenture creating no charge is
also perfectly legal.5

5. The holder of debentures is the creditor of the company and not its member anda
debenture carries no voting right at any meeting of the company.6

Robson v. Smith (1895) 2 Ch. 118
Knightsbridge Estates Ltd v. Byrne, (1940) AC 613.
Seva Singh v. Mukta Singh AIR 1936 Lah. 727
Calcutta Safe Deposit Co Ltd v RanjitMathuradasSampat, (1971) 41 Comp. Cas 1063.

II. Types of Debentures

I. Registered and Bearer Debentures.Considered from the point of view of

transferability of ownership, debentures may either be registered or they may be bearer
debentures. Registered debentures are payable to a registered holder and are transferable in
the same manner as shares. The bearer debentures, on the Other hand, are payable to bearer
and are transferable like a negotiable instrument by mere delivery. The person to whom a
bearer debenture is transferred becomes a holder in due course and unless contrary is
shown, he is entitled to recover the principal sum and the interest accrued thereon.7

II. Redeemable and Irredeemable Debentures.From the point of view of redeemability,

debentures may either be redeemable or they may be irredeemable. Debentures are generally
redeemable as they are issued on the terms that the company is bound to repay the amount of
debenture at a fixed date, or upon demand or after notice, or under a system of periodical
drawings. Redeemable debentures may be re-issued unless the articles prohibit their re-issue
or there is a resolution showing the intention of the company to cancel the redeemed
debentures. The person who is re-issued the debentures shall continue to have the same rights
and priorities as he was enjoying prior to re-issue.8An irredeemable debenture is also known
as a perpetual debenture and no time is fixed for the company to repay the loan, although it
may choose to pay it back anytime it likes. Thus the holder of an irredeemable debenture
cannot demand repayment of his money so long as the company is a going concern and does
not make default in payment of interest.

III. Secured and Unsecured Debentures.On the basis of security, debentures may either
be secured or unsecured. When debentures are secured by a mortgage or a charge on the
property of the company they are called secured debentures but when they are not so secured,
they are called unsecured or naked debentures containing a mere promise to pay.9

Gower: Modern Company Law (3rd Ed) p 343
Paranjape N.V. The New Company Law, 2013 (6th Ed) p. 241
Ibid p.242

IV. Convertible debentures.A convertible debenture contains an option entitling the

holder to convert whole or part of his debt, on certain dates or during certain periods, into
shares of the company at stated rates of interest. Section 62 (3) of the Companies Act, 2013
permits the conversion of convertible debentures into shares by special resolution of the
company and approval of the Central Government. The Central Government has notified1
Public Companies (Tejms of Issue of Debentures & Raising of Loans with Option to Convert
such Debentures into Shares) Rule, 1977 in this regard.

V. Rights Debentures.Recent trend of the companies is to offer debentures to the existing

equity shareholders on rights basis, in proportion to their shareholders subject to a minimum
of one debenture to each equity shareholder. The debenture-holders are usually given option
to apply for additional debentures in addition to the number of debentures they are entitled to
subscribe. The allotment is, however, made on equitable basis with reference to equity shares
held by the applicants. The shareholders may renounce the offer of rights debenture in favour
of some other person or persons.10

III. Contents, Stock and Issue of Debentures

III. A Contents of Debentures

A debenture usually contains four main clauses, namely:
1. A promise by the company to repay the principal amount on a certain fixed date;
2. A promise to pay interest at a fixed rate;
3. A charge on the companys assets; and
4. A provision that debenture is issued subject to conditions which are endorsed.

III. B Debenture Stock

Companies desiring to raise larger sum of money from the public may decide to issue
debenture stock instead of debentures. Debentures are issued when the amount borrowed
consists of a number of separate debts of equal amount whereas in case of debenture stock,

Supra Note 8 p.242

the whole amount borrowed is regarded as consolidated into one single composite debt, each
debenture-stockholder receiving a debenture stock certificate testifying the amount of his
contribution or holding. Thus while debenture is the description of an instrument the
debenture stock contains description of debt.11

III. C Issue of Debentures

The power to issue debentures is usually set out in the memorandum. The debentures can be
issued in the same manner as shares in a company. But unlike shares they can be issued at a
discount if the articles so authorize, the reason being that they do not form a part of the
capital of the company. Debentures can also be issued at a premium. The interest payable on
debentures is debt and can therefore be paid out of capital. Section 71 of the Companies Act,
2013 prohibits issue of debentures carrying voting right at any meeting of the company.

The form of application for debentures must be accompanied by a copy of memorandum

containing the salient features of the prospectus of the company. The document by which the
offer is made to the public, shall for purposes be deemed to be a prospectus of the
company.12The copy of the prospectus sent for registration must be signed by every director
or proposed director and also by offerers.

Where the company has not issued any prospectus, an allotment of debentures cannot be
made unless a statement in lieu of prospectus is filed with the Registrar of Companies at least
three days before the first allotment.13

IV. Debenture Trust Deed

Section 71 (7) of the Companies Act, 2013 provides for a debenture trust deed for securing
any issue of debentures which shall be open for inspection to any member or debenture-
holder of the company and he shall be entitled to obtain copies of such trust deed on payment
of prescribed fee. Sub-section (10) provides that in case failure to comply with the above
provision, the company shall be liable to pay interest on the debenture when it is due and the

Supra note 8 p.243
Section 25 of Companies Act, 2013.
Section 71 (11).

Tribunal after hearing the parties, may order the Company to pay the principal with

IV. (A) Debenture Trustees

Section 71 (5) provides for the appointment of debenture trustees and enumerates the duties
of such trustees. It provides that no company shall issue a prospectus or a letter of offer to the
public for subscription of its debentures, unless the company has, before such issue,
appointed one or more debenture trustees for such debentures and the trustees have given
their consent to the company to be so appointed.

IV. B Liability of Company to Create security and Debenture Redemption

Where a company issues debentures after the commencement of this Act, it shall create a
debenture redemption reserve for the redemption of such debentures, to which adequate
amounts shall be credited, from out of its profits every year until such debentures are
Where the company fails to redeem the debentures on the date of maturity, the Tribunal may,
on the application of any or all the debenture-holders, after hearing the parties concerned,
direct the company to redeem the debentures forthwith alongwith interest due thereon.
If default is made in complying with the order of the Tribunal, the officer of the company
who is in default shall be punishable with imprisonment which may extend to three years and
shall also be liable to a fine of not less than two lakh rupees which may extend to five lakh
rupees, or with both.15

IV. C Reissue of Redeemed Debentures

A company which has redeemed some of the debentures of a series to reissue the redeemed
debentures unless-

1. The articles or the conditions of issue provide otherwise; or

Supra note 9 p.244
Section 71 (11)

2. The company is under a contract not to re-issue the redeemed debentures; or

3. The company has, by resolution or otherwise manifested an intention to cancel the
redeemed debentures.

The object of this section is to override the principle according to which a debenture once
paid off was extinguished, and could not be reissued.

When a company has power to reissue debentures which have been redeemed, particulars of
the redeemed debentures which can be reissued must be stated in every balance sheet.
The holders of reissued debentures have the same rights and priorities as if the debentures
had never been redeemed, i.e. they rank paripassu with the debentures left unredeemed. A
company cannot reissue redeemed debentures containing provisions as to redemption
different from those of the original issue.

Debentures deposited to secure advances on current account or otherwise are not deemed to
have been redeemed only by reason of the account having ceased to be in debit. Thus where
such an account is temporarily in credit and again in debit, the debentures deposited as
security are not deemed to have been redeemed and reissued so as to require re-stamping.16

V. Register of Debenture Holders [Section 88 (5)]

A company issuing debentures has to maintain a register of debenture-holders just as it

maintains a register of members of the company. The register of debenture-holders contains
the following particulars :17

1. The name, address and occupation of each debenture holder;

Supra note 8 p.245
Section 88 (5)

2. The debentures held by each holder, showing numbers and the amount actually paid or
deemed to be paid;
3. The date at which a person's name was entered in the register as a debenture- holder; and
4. The date when a person ceased to be a debenture-holder.

The company has to maintain an index containing all relevant entries regarding debenture-
holders for the sake of convenience. Any change in the particulars of the register should be
reflected in the Index. The register of debenture holders may be closed in the same manner as
the register of members. The provisions relating to inspection or making extracts or taking
copies of the register of debenture-holders are similar as those for a register of members of
the company.

VI. Remedies available to Debenture-holders against non-

A debenture-holder has the following rights in the event of non-payment of principal amount
or interest by the company:

1. If the issue of debentures has not created any charge on the company's property, the
debenture-holders being unsecured creditors would be on the same footing as that of an
ordinary creditor. He may, therefore, either sue the company for payment of principal and
interest or in the alternative, file a petition to the Tribunal under Section 272 for winding up
of the company for its inability to pay-off its debts.

2. In case of secured debenture-holders, in addition to the aforesaid remedies which are

available to an unsecured debenture-holder, he can exercise any of the powers given to him
by the debenture trust-deed including power to appoint a receiver or to sale the company's

property; or he may apply to the Court for the appointment of a receiver or for an order for
the sale of company's property.18

3. In case of non-payment by the company due to insolvency, the debenture-holders may ask
for valuation of the security pledged by the company and get payment of principal and the
amount but they shall not be entitled for payment of interest after the date of liquidation of
the company.

4. The secured debenture-holder can apply to the Tribunal to foreclose the interest of the
company in the assets charged. This order of foreclosure will terminate the interest of the
company in the property and the debenture-holder will become the owner thereof. The
foreclosure order may extend even to the uncalled capital of the company.19

5. Since the debenture holders are beneficiaries under the debenture trust-deed if it is
executed, the remedy to enforce the debenture securities may vest in trustees.1
The petition filed by the debenture-holder for the payment on debentures by the company
must specify the exact amount claimed. The company cannot demand extension of time-limit
for making payments on matured debentures3 and in case of default in payment by the
company the debenture holder in the capacity of mortgagor may move the Tribunal for sale
of the company's charged property and receive the amount due on debentures.

VI. A Appointment of Receiver

The trustees of the debenture-holders if there is a trust deed, or debenture-holders themselves
may make an appointment of a Receiver without reference to the Tribunal, provided that

1. There is a fixed or floating charge on the company's assets;

2. The debentures or trust-deed contain an express power of appointing a receiver;
3. The principal or interest is in arrears, or winding-up has commenced; or
4. An occasion justifying the exercise of power has arisen.
Narotamdas T Topani v. Bombay Dyeing &Mfg Co. Ltd (1986) 3 Com LJ 170
Bank of Baroda v. Panesar (1986) 3 ALL ER 751 (ChD)

The Tribunal may appoint a receiver upon application by debenture-holders provided that

1. There is a charge on company's assets;

2. The winding up of company has commenced even though principal and interest on
debenture is not paid to the debenture-holders;
3. There is danger of loss or diminution in value of company's assets;
4. If the company proposes to distribute its reserve-fund among its members by way of
dividend leaving the debenture-holders insufficiently secured.20
5. If there is possibility of company's property being misused, misappropriated or destroyed
due to mismanagement in the company.

The appointment of the receiver has to be brought to the notice of the Registrar of
Companies within thirty days who shall make an entry about this appointment in the register
of charges21 on payment of prescribed fee by the person or persons at whose instance the
appointment is made. A similar notice is required to be given by the Receiver when he ceases
to act.22Failure to give notice is punishable with fine under Sec. 137(3) of the Companies
Act. The receiver should also give a notice of his appointment within thirty days of such
appointment to the Income Tax Officer who is entitled to assess the income of the company.
Failure to give such notice shall render the receiver liable to the extent to which the company
is liable to pay income tax.23

VI. B Manager
Once the receiver has taken possession of the assets of the company, they cannot be normally
used by the company for business. Sometimes it may be necessary to keep the company's
business going for the sake of its beneficial winding up. In such a case, the creditors and
debenture-holders may appoint a manager also or get him appointed by the Tribunal. The

Re Tilt Cove Copper Co Ltd (1913) 2 Ch 588.
Section 84 (1) of the Companies Act 2013
Section 84 (2) of the Companies Act 2013
Section 78 of the Income Tax Act.

provisions relating to appointment, rights, powers etc., of the receiver shall also apply to a
manager appointed for the purpose.
Where a receiver or manager is appointed by the Tribunal, his function as manager casts a
duty upon him to preserve the goodwill and property of the company in the interest of the
debenture-holders as also the company itself.24

VII. Guidelines for Issue of Debentures by Public Sector

The Central Government has issued the following guidelines for issue of debentures by
Public Sector Companies25 :
1. Applicability.The guideline will apply to issue of secured convertible as well as
non-convertible debentures by public limited companies and public sector companies.

2. Objects of Issue.The objects of issue can be one or more of the following:

a. setting up of new projects;
b. expansion or diversification of existing projects;
c. normal capital expenditure for modernisation;
d. merger/amalgamation of companies in pursuance pf schemes approved by
banks/financial institutions and/or any legal authority;
e. restructuring of capital as approved by banks/financial institutions and/or any
other legal authority;
f. acquisition of assets in accordance with legal provisions and/or M.R.T.P. Act;
g. to augment long-term resources of the company for working capital

Bishop v. Bonhama (1988) BCLC 656 (CA)
Vide Notification No. S-11(9)-CC(II) 84 15-09-1984 by the Ministry of Finance.

3. Quantum of issue.The amount of issue of debentures in the case of working capital

requirements shall not exceed 20 per cent of the gross current assets, loans and advances.
The amount of issue of debentures for project financing and other objects will be considered
on the basis of the approvals of the scheme of finance by the financial
institutions/banks/govemment under the provisions of the M.R.T.P. Act (now Competition
Act, 2002) etc.

4. Debt-equity ratio.The debt-equity ratio shall not normally exceed 2 :1. For this purpose
'debt* will mean all term loans, debentures and bonds with an initial maturity period of five
years or more, including interest accrued thereon. It also includes all deferred payment
liabilities but it does not include short-term bank borrowings and advances, unsecured
deposits or loans from the public, shareholders and employees, and unsecured loans or
deposits from others. It should also include the proposed debenture issue.

5. Interest rate.In the case of convertible debentures issued by noncompetition and non-
FEMA26companies the rate of interest shall not exceed 14 per cent per annum. In respect of
issue of convertible debentures by companies falling within the scope of the MRTP and
FERA Acts, the maximum rate of interest shall be 12.5 per cent per annum. In the case of
non-convertible debentures, the rate of interest shall not exceed 14 per cent per annum.

6. Period of redemption.Debentures shall not normally be redeemable before the expiry

of the period of 7 years except in the following cases:

1. A company will have the option of redeeming the debentures from the 5th to the 9th year
from the date of issue in such a way that the average period of redemption continues to be 7
years. While exercising such an option the small investors having debentures of the face
value not exceeding Rs. 5,000 will have to be paid in one installment only.

Substituted with FERA wef Feb 1 2000.

2. In case of non-convertible debentures or non-convertible portion of convertible debentures

a company may have the option of getting the debentures converted into equity fully with the
approval of and at such a price as may be determined by the Controller of Capital issues. The
debenture holders will, however, be free not to exercise this right.

7. Price at the time of redemption.A premium up to 5 per cent of the face value can be
allowed at the time of redemption in the case of non-convertible debentures only.

8. Denomination of debentures.The face value of the debentures will ordinarily be one

hundred rupees each.

9. Listing of debentures.The debentures shall normally be listed on the stock exchange

except in the following situations:
1. Companies may make private placement of non-convertible debentures with
banks/financial institutions and such agencies (e.g., Army Group Insurance Schemes)
as approved by Controller of Capital Issues.
2. Companies may make private placement of non-ccnvertible debentures with
corporate bodies and individuals with the approval of Controller of Capital Issues.
10. Security of debentures.Only secured debentures shall be permitted for issue to the

11. Underwriting of debentures.The issue of debentures shall be underwritten. A

relaxation may be permitted in this regard if the Controller of Capital Issues is otherwise
satisfied that the issue need not be underwritten.

12. Listing of shares of companies proposing debenture issue. (1) The shares of the
company proposing to issue debentures must be listed in one or more stock exchanges and
the market quotation of its shares must have been at or above par value during 6 months prior
to the date of application for the issue of debentures.
1. Simultaneous listing of shares and debentures of companies shall also be permitted.

2. The provision regarding listing of shares will not apply to public sector companies
provided : (a) the fair value of the shares of such companies is equal or more than the
par value; and (b) such companies have declared dividends in the year immediately
preceding the year of proposed issue
13. Linking of share issue with debenture issue.Linked issue of shares and debentures
may be permitted only in cases where the interest rate offered in respect of non-convertible
debentures is not more than the maximum rate prescribed for the convertible debentures.
Simultaneous issue of equity and convertible/non-convertible debentures may be permitted
provided the investors are free to subscribe to either shares or debentures or both at their

14. Extra incentives.Schemes which aim at providing an interest rate exceeding 13.5 per
cent but which have built-in features of the convertible debenture issue shall not be



1. A.K. Majumdar Company Law & Practice ( Taxmanns) 13th Ed. 2008
2. Avtar Singh Company law 16th Ed.2009
3. D.S.R. Krishnamurti, TAXMANNS Company Law 2006
4. Dutta on company Law 4rth.Ed. 1976 .
5. Kailash Rai on Company law 9th Ed. 2005


1. Companies (Amendment) Act 1996

2. Companies (Amendment) Act 2002
3. Constitution of India
4. Indian Companies Act 1850
5. Indian Companies Act 1956


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2. Company Law Journal
3. Supreme Court Cases (Journal Section


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