Answer: The issue of debentures is governed by Section 71 of the Companies Act, 2013, the Companies (Share Capital and Debentures) Rules, 2014 and, for listed/public issues, SEBI regulations. The procedure is as follows:
- Board resolution: the Board of Directors passes a resolution at a Board meeting deciding to issue debentures, their type, amount, rate of interest, period and security (Section 179(3)).
- Approval of members: a special resolution of members is needed if the borrowing exceeds the paid-up capital, free reserves and securities premium (Section 180(1)(c)), or if convertible debentures are issued (Section 71(1)). The resolution is filed with the Registrar in Form MGT-14.
- Credit rating: for a public issue, the debentures are rated by a SEBI-registered credit rating agency and the rating is disclosed in the offer document.
- Appointment of debenture trustee: a debenture trustee must be appointed before the issue of prospectus or letter of offer, where the offer is made to the public or to the members exceeding 500. His written consent is obtained and stated in the offer document.
- Prospectus / letter of offer: a prospectus (for a public issue) or private placement offer letter (Form PAS-4) is prepared, approved and filed with the Registrar (and SEBI and the stock exchange for listed issues).
- Applications and application money: applications are invited and the application money is received in a separate bank account.
- Allotment: the Board allots debentures, letters of allotment are sent to successful applicants and regret letters with refund to others. The return of allotment is filed with the Registrar.
- Debenture trust deed: for secured debentures, a debenture trust deed in Form SH-12 is executed within 60 days of allotment.
- Creation and registration of charge: the charge on the company’s assets is created in favour of the trustee and registered with the Registrar within 30 days in Form CHG-9.
- Debenture certificates / demat credit: debenture certificates are issued within 6 months of allotment, or the debentures are credited to the demat accounts of the allottees. A register of debenture holders is maintained.
- Debenture Redemption Reserve and investment: where required by the Rules, the company creates a Debenture Redemption Reserve and invests or deposits the prescribed percentage of debentures maturing in the year.
- Listing: for a public issue, the debentures are listed on a recognised stock exchange.
Debentures cannot carry voting rights (Section 71(2)), and they are redeemed as per the terms of issue.
