S.Y.J.C. (Commerce) Prof.

Vijay Patil

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CHAPTER 4
ISSUE OF DEBENTURES
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Q.1. Briefly Explain the Provisions of Companies Act, 2013 for Issue of
Debentures.
Ans: A) MEANING:
Debentures are one of the principal sources of raising borrowed
capital to meet long and medium term financial needs.

B) PROVISIONS OF COMPANIES ACT, 2013:

If company issues debentures, it has to fulfil the following provisions
as per Company Act, 2013:

1. No voting rights:
 A company cannot issue debentures with voting rights.
 Debentures holders are creditors of the company
 Hence, they do not have any voting rights except in matters affecting
them.

2. Debentures certificate:
 Company has to issue Debentures certificate to the debentures
holders within 6 months of allotment of debentures.
 Company has to create a ‘Debentures Redemption Reserve Account’
of profits of the company available for payment of debentures.
 As per Companies [Share Capital & Debentures] Amendment Rules,
2019 MCA has removed Debenture Redemption Reserve
requirement for listed companies, NBFCs and Housing Finance
Companies.

3. Appointment of Debenture Trustees:

 If the company issues prospectus or invites more than 500 people,
company has to appoint one or more Debentures Trustees.
 Debentures trustees protect the interest of the debentures holders.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

 Company has to appoint trustees by entering into a contract as

Debenture Trust Deed.

4. Types of debentures:
a. A company can issue:
i. Secured or Unsecured debentures
ii. Fully or Partly convertible debentures or Non-convertible
debentures
b. To issue convertible debentures, a special resolution has to be
passed in the General Meeting.

5. Approach National Company Law Tribunal [NCLT]:

 Debentures Trustees have to redress the grievances of debentures
holders.
 If the company defaults in repaying the principal amount on
maturity, debentures trustees can approach National Company Law
Tribunal [NCLT] for redressal.

6. Payment of interest & redemption:

 A company shall redeem the debentures and pay interest as per
terms and conditions of their issue.

7. Impose restrictions:
 When company are unable to redeem principal amount of
debentures, Debenture trustee may approach NCLT.
 NCLT can order a company to restrict incurring further liabilities, so
as to protect interest of the debentures holders.

8. Punishment:
 If the company fails to comply with provisions of the Act, then the
company and its officers shall be liable to pay fine or imprisonment
or both; as prescribed in the Act.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

C) CONCLUSION:
It is a borrowed capital of the company & debenture holders are the
creditors of the company.
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Q.2. Briefly Explain the Provisions of Companies (Share Capital and

Debentures) Rules, 2014 to be followed by the company for issue of
debentures.
Ans: A) MEANING:
Debentures are one of the principal sources of raising borrowed
capital to meet long and medium term financial needs.

B) PROVISIONS OF COMPANIES RULE, 2014:

If company issues debentures, it has to fulfil the following provisions
as per Companies (Share Capital & Debentures) Rules, 2014.

1. Tenure of Secured Debentures:

 All secured debentures should be redeemed within 10 years from
the date of its issue.
 Only certain companies can issue debentures beyond a period of 10
years but not exceeding 30 years.

2. Create charge on assets:

 Company has to create a charge on the assets of the company or its
subsidiary company or holding company.
 The value of charge should be adequate to cover entire value of
debentures and interest.
 If a government company issues secured debentures then it need
not create any charge on its assets.

3. Create Debenture Redemption Reserve:

 Company has to create a Debentures Redemption Reserve Account
of the profits available for payment of debentures.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

 Company has to maintain at least 25% of value of its outstanding

debentures in Debentures Redemption Reserve Account.
 Company has to invest or deposit on or before 30th April each year.
 Money from this account is used for redemption of debentures.

4. Appointment of debentures trustees:

 Before issuing prospectus or offer letter, then company has to
appoint a debenture trustee.
 Company also has to execute a Debentures Trust Deed either:
i) Before issuing Prospectus or Offer Letter.
ii) Within 60 days from Allotment of Debentures.

C) CONCLUSION:
It is a borrowed capital of the company & debenture holders are the
creditors of the company.

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Q.3. What are the Requirements as per SEBI for Issue of Debentures?
Ans: A) MEANING:
Debentures are one of the principal sources of raising borrowed
capital to meet long and medium term financial needs.

B) REQUIREMENT OF SEBI:
The company has to fulfil the following requirements of SEBI for
issue of debentures:
1. Credit rating:
 SEBI (Issue of Capital & Disclosure Requirements) Regulations 2018
states that companies should get credit rating for issuing
debentures.
 As per SEBI, companies must obtain credit rating from one or more
credit rating agencies.
 Rating should be mentioned in offer letter or prospectus.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

2. Retention of over subscription:

 Company can retain over subscription money up to maximum 100%
of the base issue size or,
 Any lower unit as specified in offer letter or prospectus.

3. Underwriting:
 Company may enter into an underwriting agreement with
underwriters for its public issue of debentures.
 Appointment of underwriters must be mentioned in offer letter or
prospectus.

4. Minimum subscription:
 SEBI Regulations 2008 (Regulation 12) states the minimum
subscription to be collected by a company.
 As per SEBI, the minimum subscription for public issue of
debentures is 75% of base issue size i.e. Rs. 100 crores.
 If the minimum subscription is not received, entire money received
should be refunded within 12 days from the date of closure of issue.

C) CONCLUSION:
It is a borrowed capital of the company & debenture holders are the
creditors of the company.

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Q.4. Who are Debenture Trustees? / Write short note on the same.
Ans: A) MEANING:
Debentures are one of the principal sources of raising borrowed
capital to meet long and medium term financial needs.

B) FEATURES:
The debenture trustees can be explained as follows:
1. Appointment:
 A company which issues prospectus or invites more than 500
persons for debentures has to appoint one or more debenture
trustees.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

 Company issuing secured debentures must also appoint debentures

trustees.

2. Purpose of appointment:
 Debentures trustees are institutions which protect interest of
debenture holders.

3. Custodians of assets:
 The company creates a charge on its assets of the company.
 Charge is created in favour of debentures trustees.
 So, trustees become the custodian of the assets.

4. Period of appointment:
 Debentures Trustees are appointed before offer letter or prospectus
issued or within 60 days after the allotment of debentures.

5. Written consent:
 Trustees must give a written consent to as a debentures trustees.

6. Mention in prospectus:
 Offer letter or prospectus must mention the names of debentures
trustees.

C) CONCLUSION:
It is a borrowed capital of the company & debentures holders are the
creditors of the company.
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Q.5. Explain briefly the Procedure for Issue of Debentures.

Ans: A) MEANING:
Debentures are one of the principal sources of raising borrowed
capital to meet long and medium term financial needs.

B) PROCEDURE RELATING TO ISSUE OF DEBENTURES:

A company secretary is mainly related with entire process of issue
of debentures. The procedure of issuing debentures is as follows:

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S.Y.J.C. (Commerce) Prof. Vijay Patil

1. Board resolution:
 The Board of Directors is required to pass resolution in Board
Meeting. Resolution should clearly specify number of debentures to
be issued, face value of debentures, rate of interest payable, terms
of redemption, etc.

2. Consent of SEBI:
 If the issues exceeds Rs. 1 crore, permission from SEBI has to be
obtained.

3. Approval of stock exchange:

 Approval of stock exchange is required to be taken before prospectus
is issued to the public.
 As per SEBI guidelines, company has to get its debentures rated by
two credit rating agencies such as CRISIL, CARE.
 It should be disclosed in prospectus.

4. Trust Deed:
 Trust deed has to be executed between the company and trustees.
 Trustees are those who can give guarantee of protecting interest of
debentures holders.

5. Prospectus issue:
 Prospectus is an advertisement for the issue of debentures.
 Prospectus has to be filed with registrar before issuing to general
public.

6. Application & allotment:

 Company must make arrangement to receive applications along with
application money through company’s banker.
 Debentures are to be allotted to applicants by passing suitable
resolution in the board meeting.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

7. See final arrangement:

 Debentures certificates are prepared by the secretary, which is
signed by at least two directors.
 Certificates issued to investors within 3 months from date of
allotment.
 After it, all details about debentures holders are entered in Register
of Debentures holders.
 If number of debentures holders exceeds 50, company is required to
maintain Index of Debentures holders.
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OBJECTIVE TYPE QUESTIONS

A) Select the correct option and rewrite the statements.

1. A company raise debt capital through issue of ………………
a. equity shares b. preference shares c. debentures

2. Power to issue debentures rests with ………………

a. chairman b. secretary c. board of directors

3. Debentures certificate must be issued within ……………… month of allotment.

a. 3 b. 6 c. 9

4. Fully convertible debentures are converted into ……………… shares on

maturity.
a. equity b. deferred c. bonus

5. The company has obtain consent of ……………… if issue of debentures exceeds

Rs. 1 crore.
a. SEBI b. Register c. N.S.E.

6. In order to redeem old debentures the company issues ………………

a. assets b. public deposits c. fresh debentures

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S.Y.J.C. (Commerce) Prof. Vijay Patil

7. The word debenture is derived from ……………… word.

a. French b. Latin c. Greek

8. Debentures cannot be redeemed at ………………

a. par b. discount c. premium

9. The work related to allotment of debentures must be completed within

……………… days.
a. 60 b. 90 c. 120

10. SEBI guidelines require company to obtain credit rating from at least
……………… rating agencies.
a. 1 b. 2 c. 3

11. Company should issue letter of ……………… to debentures holders to give

details of conversion.
a. option b. allotment c. regret

12. Debenture certificate is to be signed by ……………… directors.

a. one b. two c. three

13. A company cannot issue ……………… with voting rights.

a. equity shares b. debentures c. securities

14. A company can issue ……………… convertible debentures.

a. only partly b. only fully c. partly or fully

15. Money from ……………… account is used for redemption of debentures.

a. capital b. Debenture Redemption Reserve c. P & L

16. ……………… protect the interest of debentures holders.

a. Debentures trustees b. debentures holders c. Redemption Reserve

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S.Y.J.C. (Commerce) Prof. Vijay Patil

17. A company which issues prospectus or invite more than 500 persons to buy
its debentures has to appoint ………………
a. Register of companies b. debentures holders c. debentures trustees

18. The contract between company and debentures trustees of company is called
as ………………
a. Debentures Trust Deed b. Letter of Offer c. Prospectus

19. Secured debentures must be redeemed within ……………… from date of its
issue.
a. 10 days b. 10 years c. 15 years

20. A company issuing ……………… debentures must create a charge on the

assets of the company.
a. secured b. unsecured c. redeemable

21. Prospectus for allotment of debentures should be completed within

……………… from the date of receipt of applications.
a. 6 months b. 3 months c. 60 days

22. The details of allotment of debentures must be entered in ………………

a. Register of debentures holders b. Register of members
c. Register of creditors.

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B) Write a word or a term or a phrase:

1. Type of resolution needed to issue convertible debentures.
Ans: Special Resolution.

2. Account to be created for the redemption of debentures.

Ans: Debenture Redemption Reserve Account.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

3. Institution appointed by the company to protect the interest of debenture

holders.
Ans: Debenture Trustee.

4. Period within which secured debenture should be redeemed.

Ans: 10 years.

5. Type of debentures on which the company has to create a charge on its

assets.
Ans: Secured Debenture.

6. The document contains terms and conditions agreed upon by the company
and the Debenture trustees.
Ans: Debenture Trust Deed.

7. The time period within which the procedure for allotment of debenture is
to be completed from the date of receipt of applications.
Ans: 60 days.

8. Period within which debenture certificate must be issued by a company.

Ans: 6 months.

9. An institution that redresses grievances of debenture holders.

Ans: Debenture Trustee/NCLT.

10. The authority has the power to issue debentures.

Ans: Board of Directors.

11. Agency which rates the debentures of a company.

Ans: Credit Rating Agency.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

C) State whether the following statements are True or False.

1. Debenture holders have no voting rights.
Ans: True.

2. The company cannot issue non-convertible debentures.

Ans: False.

3. Special Resolution is needed to issue convertible debentures.

Ans: True.

4. Debentures holders are paid interest.

Ans: True.

5. Debenture Trustees cannot approach NCLT to redress grievances of

debenture holders.
Ans: False.

6. All secured debentures should be redeemed within 20 years from the date
of their issue.
Ans: False.

7. The company has to create a charge on its assets when it issues secured
debentures.
Ans: True.

8. Debenture Trustees are appointed to protect shareholders.

Ans: False.

9. Debentures certificate should issue within 6 months of allotment of

debentures.
Ans: True.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

10. After allotment of Debentures names of Debenture holders is entered in

the Register of Members.
Ans: True.

11. A company need not maintain Register of Debentures holders if

debentures are issued in demat form.
Ans: True.

12. Members & debentures holders have the right to inspect the Trust Deed.
Ans: True.
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D) Find the odd one:

1. Debenture holders, Interest, Dividend.
Ans: Dividend.

2. Debenture Trustee, Court, NCLT.

Ans: Court.

3. Secured debenture, convertible debenture, Irredeemable debenture

Ans: Irredeemable.

4. Debentures Trustees, Trust Deed, Shareholders.

Ans: Shareholders.

E) Complete the sentences:

1. A legal instrument conveying the assets of a company to the Debenture
trustees is called ___________.
Ans: Debenture Trust Deed.

2. To protect the interest of Debenture holders a company appoints

___________.
Ans: Debenture Trustee.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

3. On receipt of application and money, the procedure for allotment of

debentures should be completed within ___________.
Ans: 60 days.

4. Authority to create charge on company’s assets is with the ___________.

Ans: Debenture Trustee.

5. Secured debentures should be redeemed within ___________.

Ans: 10 years.

6. To stop a company from incurring further liabilities, the Debenture trustee

can approach ___________.
Ans: NCLT.

7. A company which issues prospectus or invites more than 500 persons to

subscribe for its debentures, has to appoint ___________.
Ans: Debenture Trustee.

8. Return on investment on debenture is called ___________.

Ans: Interest.

9. For public issue of debentures of ₹ 100 crores, minimum subscription

should be ___________.
Ans: 75%.

10. For public issue or rights issue of convertible debentures, as per SEBI, a
company must obtain ___________.
Ans: Consent of shareholder.

11. Offer letter is issued if a company makes ___________ of debentures.

Ans: Private placement.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

F) Select the correct option and complete the table.

(Issued within 6 months of allotment, Names of debenture holders,
Secured debentures, Trust Deed, Debenture holders)

Sr. Sr.
Group ‘A’ Group ‘B’
No. No.
1) Debentures trustees a) ………………………….
2) …………………………. b) Charge of Assets

3) Register of Debentures c) ………………………….

4) …………………………. d) Debenture certificate
5) No Voting Rights e) ………………………….

Ans:
Sr.
Group ‘A’ Ans.
No.
1) Debentures trustees Trust deed
2) Secured Debentures Charge of Assets
3) Register of Debentures Name of debenture holders
4) Issued within 6 months of
Debenture certificate
allotment
5) No Voting Rights Debenture holder

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G) Correct the underlined word and rewrite the following sentences.

1. The details of debenture holders are entered in the Register of Members.
Ans: The details of debenture holders are entered in the Register of the
debenture.

2. Secured debentures must be redeemed within 15 years from the date of

its issue.
Ans: Secured debentures must be redeemed within 10 years from the date of
its issue.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

3. A company issuing irredeemable debentures must create a charge on the

assets of the company.
Ans: A company issuing Secured Debentures must create a charge on assets
of the company.

4. Return on investment on debentures is the dividend.

Ans: Return on investment on debentures is Interest.

5. Debenture Trustees redress the grievances of shareholders.

Ans: Debenture Trustees redress the grievances of Debenture holders.

6. Debenture certificates are issued within 3 months of allotment of

debentures.
Ans: Debenture certificates are issued within 6 months of allotment of
debentures.

7. The procedure for allotment of debentures should be completed within 90

days from the date of receipt of applications.
Ans: The procedure for allotment of debentures should be completed within 60
days from the date of receipt of applications.

8. To rate its debentures a company appoints underwrites.

Ans: To rate its debentures a company appoints a Credit Rating Agency.

9. All debentures are irredeemable.

Ans: All debentures are redeemable.

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H) Arrange in proper order:

1. (a) Obtain Credit Rating (b) Entry in register of debenture
(c) Receive application with money
Ans: (a) Obtain Credit Rating (b) Receive application with money
(c) Entry in register of debenture

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S.Y.J.C. (Commerce) Prof. Vijay Patil

2. (a) Issue debenture certificate (b) Issue prospectus

(c) Open Bank Account
Ans: (a) Issue prospectus (b) Open Bank Account
(c) Issue debenture certificate

3. (a) Hold Board Meeting for allotment (b) Issue debenture certificate
(c) Receive application with money
Ans: (a) Hold Board Meeting for allotment (b) Receive application with money
(c) Issue debenture certificate

4. (a) Obtain credit rating (b) Open Separate Bank A/c

(c) Pass Resolution to Approve Prospectus
Ans: (a) Pass Resolution to Approve Prospectus (b) Obtain credit rating
(c) Open Separate Bank A/c

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I) Explain the following terms/concepts:

1. Debentures Certificate:
Ans: Explanation:
 A debenture Certificate is an acknowledgment issued by a company with
its common seal and signature against debenture issued.
 It includes all the information of debenture issued, its face value, rate of
interest details of debenture holder, etc.
 A debenture certificate should be issued by the company within 6 months
-from the debenture’s allotment.
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2. Debenture Trustees:
Ans: Explanation:
 Debenture Trustees are institutions that are responsible to protect the
interest of debenture holders.
 If the company invites more than 500 persons to buy debentures, then it
has to appoint one more debenture trustee.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

 The company issuing secured debentures also must appoint a debenture

trustee.
 The company enters into a contract with debenture trustee.
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3. Debenture Trust Deed:
Ans: Explanation:
 Debenture Trust Deed is an agreement between the company and
debenture trustees.
 It is a legal instrument stating a relationship between the company and
the trustee.
 It covers all terms of conditions to be followed by the debenture trustee.
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4. Charge of Assets:
Ans: Explanation:
 Charge on assets means the right of the lender to be paid from a borrower’s
asset if the debt is not paid on time.
 Every year the company must report its total debts secured by a charge
on assets.
 The value of the charge should be adequate to cover the entire debenture
issued.
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5. Debenture Redemption Reserve:
Ans: Explanation:
 Company has to create a Debentures Redemption Reserve Account of the
profits available for payment of debentures.
 Company has to maintain at least 25% of value of its outstanding
debentures in Debentures Redemption Reserve Account.
 Company has to invest or deposit on or before 30th April each year.
 Money from this account is used for redemption of debentures.
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S.Y.J.C. (Commerce) Prof. Vijay Patil

J) Justify the following statements:

1. A company can issue only certain types of debentures.

Ans: This statement is True.
Explanation:
 Debentures are one of the principal sources of raising borrowed capital to
meet long and medium term financial needs.
 A company can issue:
i. Secured or unsecure debentures
ii. Fully or Partly convertible debentures or Non-convertible debentures
 To issue convertible debentures, a special resolution has to be passed in
the General Meeting.
 All debentures are redeemable.
 Hence, a company can issue only certain types of debentures.

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2. Debentures trustees is appointed by a company issuing debentures.

Ans: This statement is True.
Explanation:
 A company which issues prospectus or invites more than 500 persons for
debentures, company has to appoint one or more Debentures Trustees.
 Company issuing secured debentures must also appoint debenture
trustees.
 Debentures trustees are institutions which protect interest of debenture
holders.
 The Company creates a charge on its assets of the company.
 Charge is created in favour of debentures trustees.
 Hence, debentures trustees is appointed by a company issuing
debentures.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

3. A company has to create charge on its assets for issuing secured

debentures.
Ans: This statement is True.
Explanation:
 All secured debentures should be redeemed within 10 years from the date
of its issue.
 Only certain companies can issue debentures beyond a period of 10 years
but not exceeding 30 years.
 Company has to create a charge on the assets of the company or its
subsidiary company or holding company.
 The value of charge should be adequate to cover entire value of debentures
and interest.
 If a government company issues secured debentures then it need not
create any charge on its assets.
 Hence, Debentures trustees can approach NCLT for redressal of
grievances.
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4. Debentures trustees can approach NCLT for redressal of grievances.
Ans: This statement is True.
Explanation:
 Debentures Trustees have to redress the grievances of debentures holders.
 If the company defaults in repaying the principal amount on maturity,
debentures trustees can approach National Company Law Tribunal [NCLT]
for redressal.
 A company shall redeem the debentures and pay interest as per terms and
conditions of their issue.
 When company are unable to redeem principal amount of debentures,
Debenture trustee may approach NCLT.
 NCLT can order a company to restrict incurring further liabilities, so as to
protect interest of the debentures holders.
 Hence, debentures trustees can approach NCLT for redressal of
grievances.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

STUDY THE FOLLOWING CASE / SITUATION &

EXPRESS YOUR OPINION.

Q.1.
Rose limited company proposes to
issue debenture to the public to raise
funds. After discussion, the Board of
directors has decided to issue secured,
Redeemable non-convertible debentures
with a tenure of ten years. Please advise
the board on the following matters:

(a) Should the company appoint a

Debenture trustee?
(b) Should the company create a charge on
its assets?
(c) Can the tenure of debentures be less
than ten years?

Ans:

a) If the company issues prospectus or invites more than 500 persons, company
has to appoint one or more Debentures Trustees. So, Yes company should
appoint Debenture trustees.

b) Yes, the company should create a charge on its assets.

c) Yes, the tenure of debentures can be less than ten years.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

Q.2.

Violet Ltd. Company plans to raise ₹ 10

crores by issuing debentures. The Board of
Directors has some queries. Please advise
them on the following:

(a) Can the company issue unsecured

debentures?
(b) Can they issue irredeemable debentures?
(c) As the company is offering debenture to its
members, can such debentures have normal
voting rights?

Ans:
(a) Yes, the company can issue unsecured debentures.

(b) No, they cannot issue irredeemable debentures.

(c) No, company cannot issue debentures with voting rights.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

Q.3.

DDS financial plans to raise ₹ 10 crores by

issuing secured, Non-convertible debentures.
However, as per the Articles of Association, the
board of directors has authority only to raise up
to 5 crores. They are also considering whether to
go for a private placement or make a public offer.
Please advise them on the following:

(a) What can be the maximum tenure of the

debentures to be issued?
(b) Is the proposed issue within the borrowing
powers of the board?
(c) Within what period should the company issue
a Debenture certificate?

Ans:

(a) Company can issue secured debentures for a maximum tenure of 10 years.

(b) As per the Articles of Association, Board of Directors have authority only to
raise up to Rs. 5 crores. So, proposed issue is not within borrowing power of
board.

(c) Company has to issue Debenture Certificate within 6 months from allotment
of debentures.

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