Debenture & Charges

Session 16 & 17
Debentures
The word ‘debenture’ has been derived from a Latin
word ‘debere’ which means to borrow.

Section 2(30) of the Companies Act, 2013 define

“debenture" which 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.

However, the instruments referred to in Chapter

III-D of the Reserve Bank of India Act, 1934 and
such other instrument, as may be prescribed by the
Central Government in consultation with the
Reserve Bank of India, issued by a company, shall
not be treated as debenture.

Thus, Debenture is a written instrument

acknowledging a debt to the Company.
SEBI (ILDS) Regulations, 2008

“debt securities” means non-convertible debt securities which create or

acknowledge indebtedness and includes debentures, bonds and such
other securities of a body corporate or a Trust registered with the Board
as a Real Estate Investment Trust or an Infrastructure Investment Trust, or
any statutory body constituted by virtue of a legislation, whether
constituting a charge on the assets of the body corporate or not, but
excludes bonds issued by Government or such other bodies as may be
specified by the Board, security receipts and securitized debt instruments;
Features
Why debentures are issued?

★ Corporate Perspective

★ Investors Perspective
Kinds
Debenture vs Bonds
Section 2(10A) of the Indian Stamp Act, 1899 defines “debentures” 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;
● bonds in the nature of debenture issued by any incorporated company or body
corporate;
● certificate of deposit, commercial usance bill, commercial paper and such other debt
instrument of original or initial maturity upto one year as the Reserve Bank of India
may specify from time to time;
● securitised debt instruments; and
● any other debt instruments specified by the Securities and Exchange Board of India
from time to time.
Bonds
Section 2(5) of the Indian Stamp Act, 1899 defines “bonds” as -

“Bond” includes—

● any instrument whereby a person obliges himself to pay money to another, on

condition that the obligation shall be void if a specified act is performed, or is
not performed, as the case may be;
● any instrument attested by a witness and not payable to order or bearer,
whereby a person obliges himself to pay money to another; and
● any instrument so attested, whereby a person obliges himself to deliver grain
or other agricultural produce to another: but does not include a debenture
Simplified bonds meaning
Bonds are financial instruments issued by various entities, including governments and corporations, to raise funds from
investors. When an individual buys a bond, they are essentially lending money to the issuer for a specified period.

In return, the issuer promises to pay regular interest, known as coupon payments, and return the principal amount to the
bondholder upon maturity.

Different types of bonds include:

● Government Bonds
● Corporate Bonds
● Zero-Coupon Bonds
● Convertible Bonds
● Inflation-Indexed Bonds
● Collateralized Debt Obligations
● Floating Rate Bonds
● Green Bonds
Seems similar to a bank fixed deposit???

You may find a corporate bond similar to a fixed deposit in a bank or a post office
scheme or any such fixed‐return instrument. However, every type of investment is
different in its own way and has its own features, advantages and disadvantages.

Isn’t it same as a debenture??

In India, the terms ‘corporate bonds’ and ‘debentures’ are interchangeably used.
Though different countries have different interpretations of both the terms
‘corporate bonds’ and ‘debentures’, our Companies Act (Section 2(12)) identifies
both as same
Issue of Debenture
Private Companies/Public Companies Not Listed:

Companies Act Section 71 read with Rule 18 Companies (Share Capital and Debentures). Rules, 2014

Section 42 & 62: Private Placement with Rule 13 and 14 of the Companies (Prospectus & Allotment of
Securities) Rules, 2014.

Public Listed Companies

Section 23: Public issue

Convertible Debentures: Section 62 will be attracted by virtue of Explanation (ii) of Rule 13(1) of the
Companies (Share Capital and Debentures) Rules, 2014, which explains the meaning of the word "shares
or other securities" to include “fully convertible debentures, partly convertible debentures or any other
securities, which would be convertible into or exchanged with equity shares at a later date”.
Difference between shareholders and debenture holders
Terms of Reference
The power to issue debentures can be exercised on behalf of the Company at a meeting of the
Board under the provisions of Section 179 (3) of the Companies Act, 2013. Further Section 71
read with Rule 18 of the Companies (Share Capital and Debentures) Rules, deals with the
provisions relating to the issuance of debentures.
Section 44 of the Companies Act, 2013 states that the shares or debentures or other interest of
any member in a company shall be movable property, transferable in the manner provided by the
articles of the company.
Debentures cannot be issued with voting rights.
Creation of Debenture Redemption Reserve (DRR) by Company is mandatory
Further, section 58(2) provides that the shares or debentures and any interest therein of a public
company shall be freely transferable.
Section 56 (4) Issue certificate in 6 months
Section 71:
-May have option of conversion
-no voting rights
-Secure Debenture: Rule 18
— maturity 10 years
—-exception (30 years)-Infra/Infra Fin/Infra Debt fund
-Creation of Charge

-Appoint Debenture Trustee before offor doc and not later than 60 of allotment

-Security in name of Debenture trustee

-500 Debenture holders -appointment of one or Debenture Trustee mandatory

Debenture Trust Deed
● For Conveying the property in debenture to Trustee
● Trust in favor of Debenture Holders
● Powers of Trustee in deed
● Rights of Holders in Deed
● Creation of Security
● Consent to be taken of Debenture trustee

Qualifications & Duties of Debenture Trustee as per: Rule 18

Charges
According to section 2 (16) of Companies Act, 2013 – Charge means :

-an interest or lien

-created on the property or assets of a company or any of its undertakings or both

-as security and includes a mortgage

Features:

2 Parties: Creator and Holder

Subject Matter: Present Future

Agreement

Type of Arrangement
TYPES OF CHARGE:

Fixed Charge
Floating Charge
Crystallization of Charge
Government Stock & other Securities Investment Co. Ltd. Manila Railways,
1897 AC 81

Lord Macnaghten- explained floating Charge & Cristallisation

-Liquidation

-Happening of Event

-Appointment of receiver

-Terms of Agreement
 Chapter VI
Registration of charges
Sections 77 – 87

read with

Companies (Registration of charges) Rules, 2014

Section applicable from September 12, 2013: Section 86

Sections applicable from April 1, 2014: Sections 77 to 85 and section 87

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 Duty to register charges, etc.
Section 77, Rule 3 - 6
• It shall be the duty of the Company to register the particulars of charge signed by the Company and the
charge-holder together with the instruments within thirty days of its creation

• Form CHG-1 (other than debentures) or Form CHG-9 (Debentures including

rectification) shall be filed for registering the charge

• Charge may be on property or assets or any of its undertakings, whether tangible or otherwise, and situated in or
outside India

Time limit for registration of charge

Within thirty days After thirty days and After three hundred days of
of creation of within creation of charge
charge three hundred days of creation
With consent of Registrar in With approval of Central
Form CHG-10 Government in Form CHG-8
2
• Any subsequent registration of a charge shall not prejudice any right acquired in respect of any
property before the charge is actually registered

• Registrar shall issue a certificate of registration of charge in Form CHG-2 for certificate of
registration of charge or Form CHG-3 for certification of modification of charge, to the Company
and to the person in whose favour the charge is created

• Certificate issued by the Registrar shall be conclusive evidence that the requirements of Chapter VI
have been complied with.

• Charge created by a Company shall not be taken into account by the liquidator or any other creditor
unless it is duly registered and a certificate of registration of such charge is given by the Registrar

• Nothing in section 77(3) shall prejudice any contract or obligation for the repayment of the money
secured by a charge

2
 Application for registration of charge
Section 78
• If Company fails to register the charge, the person in whose favour the charge is created may apply to the
Registrar for registration of the charge along with the instrument created for the charge

• The Registrar may, on such application, within a period of fourteen days after giving notice to the
Company allow such registration

• If registration is effected on application of the person in whose favour the charge is created, that person
shall be entitled to recover from the Company the amount of any fees or additional fees paid by him to the
Registrar

Section 77 to apply in certain matters Section 79

Provisions of section 77 relating to registration of charges shall apply to

Company acquiring any any modification in the terms

property subject to a conditions
or or the extent or operation of
any charge registered 4
charge
 Date of notice of charge
Section 80
If any charge is registered, any person acquiring such property, assets, undertakings or part
thereof or any share or interest therein shall be deemed to have notice of the charge from the
date of such registration

Register of charges to be kept by the Registrar

Section 81, Rule 7

• Registrar shall keep a register containing particulars of the charges registered

• Register shall be open to inspection by any person on payment of such prescribed fees
for each inspection

2
 Company to report satisfaction of charge
Section 82, Rule 8
• A Company shall give intimation to Registrar of satisfaction in full of any charge within thirty days from
satisfaction of charge in Form CHG-4

• Provisions of section 77 related to time limit shall apply on registration of satisfaction of

charge

• If intimation for satisfaction is not in Form CHG-4 and not signed by the charge holder, then Registrar shall
within fourteen days, cause a notice to be sent to charge holder calling upon him to show cause as to why
payment should not be recorded

• If no cause is shown, the Registrar shall order that a memorandum of satisfaction shall be entered in the
register of charges kept by him and shall inform the Company that he has done so

• If any cause is shown under section 82, Registrar shall record a note to that effect in the register of charges
and shall inform the Company

• Nothing in the section 82 shall be deemed to affect the powers of the Registrar to make an entry in the
register of charges under section 83 or otherwise than on receipt of an intimation from the Company 2
 Power of Registrar to make entries of satisfaction and release in absence of
intimation from the Company Section 83

• The Registrar may on evidence being given to his satisfaction with respect to a registered charge:

that the debt for which the charge was given has been paid or satisfied in whole or in part, or

that part of the property or undertaking has been released from the charge or has ceased to form part of the
Company’s property or undertaking, as the case may be,

enter in the register of charges a memorandum of satisfaction with respect to the above

stated charge

• Notwithstanding the fact that no intimation has been received by him from the Company

• The Registrar shall inform the affected parties within thirty days of making the entry in the register of
charges 26
 Intimation of appointment of receiver or manager
Section 84, Rule 9

• If any person obtains an order for the appointment of a receiver or if any person appoints
such receiver or person under any power contained in any instrument, he shall within
thirty days of the passing of the order or of appointment, give notice of such
appointment to the Company and Registrar alongwith copy of order or instrument in
Form CHG-6
• Any receiver or manager shall, on ceasing to hold such appointment, give notice to the
Company and the Registrar to that effect and the Registrar shall register such notice

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 Company’s register of charges
Section 85, Rule 10 and 11

• Every Company shall keep at its registered office a register of charges in Form CHG-7
alongwith the copy of the instrument creating the charge

• Entries in the register shall be authenticated by a Director or the secretary or any authorized
person

• Register of charges shall be preserved permanently and the instrument creating a charge or
modification thereon shall be preserved for a period of eight years from the date of
satisfaction of charge by the Company

• Register of charges and instrument of charges shall be open for inspection during business
hours by any member or creditor (without fee) or by any other person (with prescribed fee),
subject to such reasonable restrictions as the Company may impose
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 Punishment for contravention of any provision of this
chapter Section 86

Company every officer who is in default

Fine: One lakh to Ten Lakh Imprisonment: maximum six months, or

rupees Fine: Twenty Five Thousand to One Lakh
rupees, or
With both

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 Rectification by Central Government in register of charges
Section 87, Rule 12
• Central Government may, on application made by the Company or interested person in Form CHG-8,
extend the time limit, if Central Government is satisfied that following omissions was accidental or
due to inadvertence or it is not prejudice the position of creditors or shareholders of the Company
Omission to file with the Registrar the particulars of any charge or modification of charge or any
charge subject to which any property has been acquired by a Company
Omission to register any charge or to give intimation to the Registrar of the payment or the
satisfaction of a charge within the time limit

Omission or misstatement of any particular in respect of charge or modification or memorandum

of satisfaction or any other entry made under section 82 or 83

On any other grounds, it is just and equitable to grant relief

• If Central Government extends the time for the registration of a charge, the order shall not prejudice
any rights acquired in respect of the property concerned before the charge is actually registered

• The order passed by the Central Government section 87(1) of the Act shall be
required to be filed with the Registrar in Form No. INC.28 28
 E Forms

Form CHG 1: Application for registration of creation, modification of charge

Form CHG 2: Certificate of registration of charge

Form CHG 3: Certificate of registration of modification of charge Form CHG 4:

Particulars of satisfaction of charge thereof

Form CHG 5: Memorandum of satisfaction of charge

Form CHG 6: Notice of appointment or cessation of receiver or manager Form CHG 7:

Register of charges

Form CHG 8: Application to Central Government for extension of time for filing particulars
of creation/modification/satisfaction of charge

Form CHG 9: Application for registration of creation or modificationof charge for

debentures