1.

INTRODUCTION
Corporate finance is one among the foremost necessary subjects within
the monetary domain. This has been deep frozen in our daily lives. All folks work
in huge or tiny firms. These firms raise capital and so deploy this capital for
productive functions. The monetary calculations that go behind raising and with
success deploying capital are what form the idea of corporate financing. The basis of corporate
finance is that there should be a separation of possession and management. Now, the
firm isn't restricted by capital that has to be provided by a private owner solely. The
overall public desire avenues for finance their excess savings. They're not content
with swinging all their cash in meaningless bank accounts. They desire to risk with a number
of their cash. It's due to this reason that capital markets have emerged. They serve the
twin want of providing companies with access to supply of funding whereas at a
similar time they supply the overall public with an excessiveness of decisions for investment.1
There are two forms of capital that an organization mainly use to fund operations—debt and
equity. Usually there are four main sources of corporate finance. The primary is plowback, or
reinvesting profits within the corporation. The second is borrowing, unremarkably through
a bond. a company sells a bond, agreeing to periodic interest payments and reimbursement of
the face price of the bond at maturity. The third supply is equity, typically stock, whereby a
company sells an ownership rights within the corporation. The fourth supply is non-
public equity and venture capital. Corporations typically raise capital and finance operations
through debt. Bank loans are one of the sources of debt however giant
firms typically communicate bonds for funding. Bonds are an IOU (I Owe You), whereby the
corporation sells a bond to an investor; agrees to create periodic interest payments, like 5 % of
the face price of the bond annually; and at the date, pays the face price of the bond to
the capitalists or the investors. There are many benefits to the corporation in exploitation of
bonds as a money instrument: the corporation doesn't hand over ownership within the firm, it
attracts additional investors, which helps in increasing its flexibility, and it may deduct the
interest payments from company taxes. Bonds do have some disadvantages: they're debt and
might hurt an extremely leveraged company the corporation should pay the interest and
principal after they are due, and therefore the bondholders have a preference over shareholders
upon liquidation. There are various aspects and conditions that a corporation should take into
considering while deciding to raise capital through bonds or through stock issuance.

2. DEBENTURES: A MODE OF CAPITAL FINANCING

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https://www.edx.org/course/introduction-to-corporate-finance-2, Daniel Wolfenzon , Stefan H. Robock Professor
of Finance and Economics, Columbia Business School, Columbia University
 A debenture is a form of debt instrument unsecured by collateral. Since debentures don't have
any collateral backing, debentures should accept the trustiness and reputation of
the establishment for support. Each firms and governments often issue debentures to
boost capital or funds. Similar to most bonds, debentures could pay periodic interest
payments referred to as coupon payments. Like alternative varieties of bonds,
debentures are documented in an indenture. An indenture signifies a legal and binding
contract between bond issuers and bondholders. The contract specifies the characteristics and
the natures of a debt, like the maturity, the temporal arrangement of interest or coupon
payments, the tactic of interest calculation, and other distinct specifications.
Governments usually issue long-run bonds—those with maturities of longer than ten years.
Often considered as low-risk investments these government bonds have the backing of the
government institutions. Corporations additionally use debentures as long loans. However,
debentures of firms are unsecured. Instead, they need the backing
of solely the money viability and trustiness of the underlying company. These debt
instruments pay a rate of interest and are redeemable or due on a set date. An
organization usually makes these regular debt interest payments before they pay stock
dividends to shareholders. Debentures are advantageous for corporations since they carry
lower interest rates and longer compensation dates as compared to other varieties of loans and
debt instruments.2

Debenture includes debenture stock, bonds and the other securities of an

organization whether or not constituting a charge on the Company’s assets or not.
Debenture means that a document, that either creates a debt or acknowledges it, and any
document that fulfills either of those two conditions may be a debenture. 3

CHARACTERISTICS OF DEBENTURES :

When a debenture is issued drafting a trust indenture is the primary thing which must be done
first. The primary trust is an agreement between the corporation which issues and therefore
the trustee that manages the interest of the investors.
Rate of Interest: The coupon rate is set, that is the rate of interest that the corporate can
pay the debenture holder or the capitalist. This coupon rate will be either mounted or floating.
A floating rate could be tied to a benchmark like the yield of the 10-year Treasury bond and
can modify because of the change in benchmark.
Maturity Date: For nonconvertible debentures, mentioned on top of, the date of maturity is
additionally a vital feature. This date dictates once the corporate should pay back the
debenture holders. the corporate has choices on the shape the reimbursement can take. Most
often, it's as redemption from capital, wherever the institution pays a payment quantity on the

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https://www.investopedia.com/terms/d/debenture.asp
3
Section 2(12) of the Company Act, 1956
 maturity of the debt. Instead, the payment might use redemption reserve, wherever the
corporate pays specific amounts annually till full reimbursement at the date of maturity.

Credit Rating: The Company's credit rating and ultimately the debenture's credit rating impact
the charge per unit that investors can receive. Credit-rating
agencies calculate the trustworthiness of company and government problems. These
4
entities give investors with an summary of the risks concerned in finance in debt.

ADVANTAGES:

 A debenture pays a daily charge per unit or coupon rate return to investors.

 Convertible debentures are often regenerated into the equity

shares after a specific amount, which helps them in being a lot of appealing to
investors.

 In the event of a corporation's bankruptcy, the debenture is paid before common

stock shareholders .

DISADVANTAGES:

 Fixed-rate debentures might have rate of interest risk exposure in

environments wherever the market rate of interest is rising.

 Creditworthiness is vital when considering the prospect of default risk from the
underlying issuer's money viability.

 Debentures might have inflationary risk if the coupon paid doesn't carry on with the
speed of inflation.

3. NON-CONVERTIBLE DEBENTURES (NCD)

Investors are forever on the lookout for improved and a lot of demonstrable schemes. The
market volatility, sometimes, even makes orthodox and trustworthy investments lose
their luster. Here, Non Convertible Debenture or NCD tested to be a dark horse once
they started delivering smaller however steady returns over time.
Like orthodox company FDs, NCD too may be a invariable investment with a
selected term and interest financial gain. Corporations issue them to boost funds,
and obviously you cannot convert it to equities. To cover up for this limitation,
investors fancy supreme returns, liquidity, low risk and tax respite as hostile convertible
debentures.

FEATURES

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https://www.investopedia.com/terms/d/debenture.asp
 Investors are forever on the lookout for improved and a lot of determinable schemes. The
market volatility, sometimes, even makes orthodox and trustworthy investments lose
their luster. Here, Non Convertible Debenture or NCD tested to be a dark horse once
they started delivering smaller however steady returns over time.
 Like orthodox company FDs, NCD too may be an invariable investment with a
selected term and interest financial gain.
 Corporations issue them to boost funds obviously one cannot convert it to
equities. To cover up for this limitation investors fancy supreme returns, liquidity,
low risk and tax respite as hostile convertible debentures.
 Companies give NCDs through open problems that the potential investors should
purchase inside specific periods. There are choices to shop for NCDs from stock
markets.
 Only corporations with sensible credit rating will have the authorization to issue
NCDs.
 Credit rating agencies conjointly rate NCDs itself. Ratings are subject to
revisions frequently. The higher credit rating an NCD has the lesser interest it
offers. Nearly each NCD guarantees twin earning potential – growth-based and
interest-based or additive opportunities.
 Usually, NCDs provide you with higher returns (10%-11%), compared
to company FDs, bank FDs and Government bonds (max 8%). 5

4. RISKS ALLOCATED

The broad regulative and legal framework applicable to provision of listed

debentures mostly consists of the companies Act, 2013 (Companies
Act) browse with the companies (Share Capital and Debentures) Rules, 2014 (Share
and Debenture Rules), the SEBI (Listing Obligations
and disclosure Requirements) rules, 2015 (LODR rules) and also the SEBI (Issue
and Listing of Debt Securities) Regulations, 2008.
Eligible Investors: the first thought for an investor is to work out whether or not it
qualifies as an eligible capitalist. Varied classes of domestic and foreign
investors are permissible to speculate in listed NCDs, subject to their various
regulative regime. In terms of domestic investors resident people, corporates,
Alternate investment funds (AIF), Mutual Funds (MF) and Non-
Banking financial institutions (NBFC) are permissible to form investments. As for
non-resident investors, Non-Resident Indians, Foreign Portfolio investors (FPI) (the
FPI rules have subsumed the Foreign Institutional capitalist and also the Qualified
Foreign Investor regime) and Foreign venture capital Investors
(FVCI) are permissible to speculate in listed NCDs. a number of the usually used
routes to infuse foreign debt (other than external industrial borrowings) includes
purchase of listed NCDs under the provision of the FPI route and NCDs which
cannot essentially be listed under the provision of the FVCI route. The
FPI rules conjointly bring down a minimum maturity amount of three (3) years for

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https://economictimes.indiatimes.com/topic/Debentures
investments in listed NCDs.

Investment Limits: Corollary to the above, eligible investors will need

to be conscious regarding investment limits applicable to them. The limit for total
foreign investment in company debt in India has been set at USD fifty one
billion that was redefined because the Combined company debt. However, specific
limits are applicable to bound investors, for example, the FPI rules limits one FPI
or an investor group from buying higher than 100 percent of the full issued capital
of an establishment. Similarly, limits on investments have conjointly been prescribed
for MFs and AIFs and minimum capitalization conditions conjointly apply to FVCIs.
Investee firms won't essentially have the data concerning eligible
investors, thus regulative awareness concerning the ever changing
regime concerning limits and pre-conditions is crucial, even before chalking out the
investment strategy.

Credit Risk: one among the prime factors that ought to be considered is that
the trustworthiness of the establishment and its ability to service the debt through
its income. There may be varied factors moving the monetary health of
the establishment which will have a sway on the trustworthiness of the establishment.
A business due diligence on the establishment is done to spot such factors, with
reference to the assets, debt equity magnitude relation, assets, valuation of
assets, gain, cash flow, dangerous credit history, net worth,
inventory, different market conditions etc., that ought
to facilitate ease considerations with reference to any credit risks.

Security Risk: Listed NCDs are typically secured (by manner of pledge, mortgage of
property, hypothecation of assets etc.) in favor of the debenture trustee who holds the
position in fiduciary capability on behalf of the NCD holders. Typically, it's not
uncommon that the charge created could be a second charge on the assets of
the establishment, from an enforceability perspective, this can be a
riskier choice with reference to seniority of debt, if attainable a primary and/or a at an
equal rate charge ought to be created over the assets of the establishment (a
charge may be created over the assets of the company's subsidiaries or its company or
its an companies) as this provides priority to the investor's debt, at the time of
liquidation. Making an English mortgage would be the well-liked choice, since the
assets stay in possession of the debenture trustee, till the compensation of
principal amount.

Enforceability Risks: under the provision of the insolvency and Bankruptcy Code,
2016 (IBC Code) any financial creditor to whom monetary debt is owed, together
with an FPI, will ask for recourse under the provision of the IBC Code. However,
once an financial condition Resolution method (IRP) has been
initiated, an Adjudicating Authority (AA) will by order, require the establishment of
suits for recovery of any property or social control of stake by a debenture
holder, together with any action under the provision of the Securitization and
Reconstruction of monetary Assets and social control of stake Act, 2002. If the IRP
fails or isn't completed inside the prescribed amount, the AA will by an order direct
the establishment to be liquidated. As mentioned earlier, adequate security cowl at a
primary charge and/or at an equal rate basis becomes imperative throughout the
liquidation method, as secured creditors are placed higher on priority, over preference
and equity shareholders.

Risk of Improper or Inadequate

Documentation: once speaking concerning enforceability, the documentation and
drafting of the Debenture legal document (DTD)/Debenture Subscription Agreement,
Debenture Trustee Agreement (DTA), and also the security documents
becomes crucial. It's vital to make sure that the agreements are rigorously crafted and
adequately sealed and registered, to shield the investor's interest and to make
sure a sleek transition at the social control stage. The DTA/DTD ought
to clearly define the intention, purpose and creation of the trust, rights, duties,
responsibilities, conjointly making certain smart company governance policies in
conjunction with liability of and indemnity towards a trustee. The documentation
primarily must be sound in terms of the Indian Contract Act, 1872, Transfer of
Property Act, 1982 and also the Indian Trust Act, 1882 (Indian Trust Act). for
example, bound provisions of the Indian Trust Act are needed to be incorporated into
the DTD, whereas conjointly being conscious concerning arbitrability of the
DTD, because the recent Supreme Court judgements has shown, disputes arising out
of Trust Deeds and also the Indian Trusts Act can't be spoken arbitration.

Regulatory Risks: in conjunction with the requisite SEBI regulations and provisions
of the companies Act that are compulsorily needed to be adhered to by
the establishment, entities in extremely regulated sectors are in addition
needed to befits multiple rules, restrictions and regulative bodies overseeing their
functioning (ex. NBFCs, entities in pharmaceuticals and healthcare). a previous legal
due diligence of the establishment is predominant under the provision of
the regulative regime that it operates under and to make sure that the corporate is
compliant and has been compliant with regulative and statutory obligations.
A legal, business and a monetary due diligence becomes necessary in regard
to further risks, that become incurable to the investor's investment at a later
stage, together with current legal proceeding either against the establishment or its
promoters/directors, restrictive covenants/prior consent necessities from existing
lenders for creation of security further debt, contingent liabilities, ability to sustain
positive and profitable growth, inflation, and inadequate coverage against
default/losses. The diligence exercise ensures that the investor is awake to all the
contingent liabilities and non-compliances before the investment is created.
The establishment will then be directed towards remedying such risks/issues. for
example, current disputes because of non-payment
of tax dues will have an adverse impact on the safety created, within the event that
the tax authorities attach the assets of the establishment.

Liquidity Risk: Most NCDs are listed on the stock exchanges and are offered in
demat kind. though this suggests they're liquid, the unsteady interest
 rates build exiting/selling NCDs through the secondary market troublesome, wherein,
if the interest rates ar high, worth |the worth} of the NCDs can consequently fall under
the provision of its face value from time to time. because of challenges with reference
to liquidity, there are few consumers of listed NCDs on the market. it's troublesome to
regulate and predict the markets and its subsequent impact on the listed NCDs,
however, different risks related to listed NCDs will simply be quenched with the
measures mentioned higher than, to make sure that inescapable risks like liquidity
risks don't conglomerate with different risks.

Tax Applications: Tax implications play a vital role in crucial one's investment
strategy. Under the provision of the current Indian tax
regime there's no deduction at supply on payment of interest for listed NCDs (except
payments/ issue under the provision of Section 193 of the Income tax Act, 1961). Also,
any interests thus earned are going to be assessable as per the relevant tax slabs of
the capitalist. Any sale of listed NCD inside a year of subscription are going to
be subject to Short Term Capital Gains Tax (STGT) and sale when one
year can attract future Capital Gains Tax (LTGT) at two hundredth
with regulation and 100 percent without indexation. For NRI investors, NCDs
purchased in convertible foreign currency is assessable at two hundredth and also
the LTGT is assessable at 100 percent of the capital gains arising while
not regulation of the acquisition price. However, STGT are taxed at traditional tax
rates. Foreign investors ought to structure their
investments supported tax feasibleness, keeping in mind implications
and blessings in varied tax jurisdictions, to mitigate
tax outflow with relevance capital gains tax and tax withholding on interest payments.
The recent changes to the Double Taxation rejection Agreement (DTAA) with
Singapore and Mauritius, shows a shift towards supply based mostly taxation of
capital gains from April 1, 2017 at 7.5% and also the same are going to be fully done
away with from 2019 onward. Further, European nation appears to be rising because
the next favorable destination for investors in search of tax edges, because the DTAA
with European nation has not been amended and conjointly native tax is merely levied
on business financial gain and not on capital gains (subject to conditions of course!). 6

5. REGULATORS

SEBI (ICDR) Regulations 2009[2]

Under the SEBI Regulation 2009, "specified securities" means that equity shares and
convertible securities. The "convertible securities" is outlined as a security that is
exchangeable with or converted in equity shares of the corporate once date of maturity
with or while not the choice of the debenture holder and it additionally includes
convertible preference share or convertible document. so the conditions to
be mentioned below are specific for equity shares however are conjointly applicable to

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 public issue of convertible debt instruments also. The establishment of such convertible
debt instruments shall comply with the following provisions:
.To get rating from one or a lot of rating agencies.

·Appointment of one or a lot of trustee as provided by Section 71(5)

of companies Act, 2013 and a few different rules.

·Creation of Debenture Redemption Reserve as provided by Section 71(4)

of companies Act, 2013

·If the corporate offers to form a security or charge on its assets with relation to the
secured convertible debt instruments, it shall guarantee that:

a) Those assets are substantial to discharge the whole principal quantity at any purpose of
time.

b) Those assets shall be free from any interference.

c) The assets or security ought to return once subtraction of liabilities

constituting previous charge, just in case the convertible debt instruments are secured by
a second or resulting charge.

d) The redemption of the convertible debt instruments shall be done by

the establishment as per the terms and conditions of the supply document.
These rules are for partially convertible debt instruments.

Provisions of Companies Act 2013 and Companies (Share Capital and Debentures) Rules,
2014

· As per the provisions mentioned in Section 71(2), no company is entitled to issue debentures
which carry voting rights. Secured debentures shall adhere to the conditions prescribed.

· Section 71(3) provides for the provision that subject to certain prescribed terms and conditions
secured debentures can be issued by a company.

·Rule 18(1) [4] provides for the following provisions:

(1) The company shall issue secured debentures, subject to the conditions that the date of
redemption must not exceed ten years from the date of issue. The exception to this rules are
companies involved in setting up infrastructure projects can exceed up to thirty years but not
beyond that.
(2) The issue of debentures shall be secured by creation of a charge on the assets and properties of
the company, the value of which shall be substantial enough for the due repayment of the principal
amount of the debentures as well as the interest on it.

(3) It is compulsory for the company to appoint a debenture trustee prior to issue of letter of offer
or prospectus for subscription of its debentures. The company shall within sixty days of allotment
of debenture, execute a trust deed in to prevent injustice and protect the interest of the debenture
holders.

(4) In the case where any issue of debenture by a company which is fully secured by guarantee
given by the Central government or state government or both then it does not require for the
creation of charge on the assets of the company.7

CONCLUSION

A debenture is one among the capital market instruments that is employed to boost medium
or end of the day stores from open. A debenture is essentially associate obligation instrument
that acknowledges a credit to the organization and is dead below the conventional seal of the
organization. The debenture record, referred to as Debenture deed contains
arrangements on installment, of intrigue and therefore the compensation of vital total and
giving a charge on the benefits of a such a company, which can provide security for the
installment over the a number of or all of the advantages of the organization. Issue of
Debentures could be a standout amongst the foremost widely known techniques for raising
the assets accessible to the organization. it's an important wellspring of back. All
organizations are offered energy to get by their articles that settle the best furthest reaches of
borrowings. The power to get monies associated to issue debentures (regardless of whether or
not in or outside India) should be practiced by the Chiefs at an fittingly gathered
meeting. wherever the organization obtains while not the professional conferred on that by
the Articles or past the total taken off within the Articles, it's a ultra vires
getting and henceforward void. Ultra Vires borrowings cannot be sanctioned by a
determination passed by the organization as a rule meeting. If there ought to arise a
happening of ultra vires borrowings the loan shark has the related to cures: (an) Injunction
and Recovery, (b) commutation, (c) Suit against administrators. A debenture could be
a record given by a company below its seal as a confirmation of associate obligation to the
holder typically rising out of a credit and most typically secured by a charge.
Debentures could be of varied sorts, viz. redeemable debentures, noncommissioned and
conveyor debentures, secured and unsecured or stripped debentures, convertible debentures.

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A debenture stock is associate obtained capital combined into one mass for comfort. An
advance makes a privilege within the loan boss to request compensation, and therefore
the substance of an obligation could be a risk upon the indebted person to reimburse
the money. A debenture legal document is one among the few instruments needed to
be dead to secure recovery of debentures what is a lot of, installment of enthusiasm on due
dates. Section 71(4) of the Act needed every organization to create a debenture reclamation
save record to that spare total ought to be attributable out of its edges accessible for
installment of profit till the purpose that such debentures are recovered and would
possibly use an equivalent just for recovery of a particular set or arrangement of
debentures because it were. Certificate of store is an archive of title to a amount store. cash
equivalent alludes to unsecured dedication notes issued by credit commendable
organizations to urge supports on a here and currently premise.
AIMS AND OBJECTIVE
The main objective of the research is to have an analytical study of the debentures
as a mode of raising capital, risk involved in its potential advantages and
disadvantages over other modes of raising capital.

RESEARCH METHODOLOGY
The research work has been done by adopting doctrinal methodology.

HYPOTHESIS
Issuer creates unsecured and secured creditor by Debt Instrument.
TABLE OF CONTENTS
1. INTRODUCTION
2. DEBENTURES: A MODE OF CAPITAL FINANCING
3. NON- CONVERTIBLE DEBENTURES (NCD)
4. RISKS ALLOCATED
5. REGULATORS
6. CONCLUSION
 CHANAKYA NATIONAL LAW UNIVERSITY,
NYAYA NAGAR, MITHAPUR, PATNA

A FINAL DRAFT OF PROJECT REPORT ON THE TOPIC :-

DEBENTUIRES: A CRITICAL STUDY AS A MODE OF CAPITAL

FINANCING

SUBMITTED TO : Mrs. NANDITA S. JHA

(Faculty of corporate laws)

SUBMITTED BY : KUNDAN KUMAR

ROLL NO: 1627

SUBJECT: CORPORATE LAW- I

SEMESTER: 7th

SESSION: 2016-2021