MEANING OF DEBENTURES Section 230 of the Companies

MEANING OF DEBENTURES Section 2(30) of the Companies Act, 2013 Debenture includesq Debenture stocks q Bonds or q Any other instrument of a company which is the proof of a debt , whether constituting a charge on the assets of the company or not

Debenture is a type of loan often used by companies to raise money, that is paid back over a long period of time and at a fixed rate of interest The term debenture means a document acknowledging a loan made to the company which provides for the payment of interest on the sum borrowed until the debenture is repaid back.

FEATURES OF DEBENTURE Movable Property Issued by the company and is in the form of certificate of indebtness It usually specifies the date of redemption. Redemption means repayment. Also provides for the repayment of the principal and interest at specified date or dates It generally creates a charge on the undertaking of the company

KINDS OF DEBENTURE Bearer Debentures Perpetual Debentures Registered Debentures Convertible Debentures

BEARER DEBENTURES Bearer debentures can be transferred by mere delivery They are payable to the bearer of the instrument( document) . No records are maintained in the register of debenture holders and registration of transfer is not necessary They are also known as unregistered debentures.

REGISTERED DEBENTURES In case of registered debentures, the transfer is not by delivery Details like the name of the debenture holder along with the type of debenture, number and value of the debenture is recorded in the register of the debenture holder. These are transferable in the same way as shares It consists of the following – i. The agreement by the company to pay the principal and interest ii. The terms of the loan

PERPETUAL DEBENTURES Also known as Irredeemable Debentures Irredeemable debentures cannot be redeemed during the lifetime of the company These are repayable at the time of liquidation or after an unspecified time interval. In simple terms, A debenture which contains a clause that it shall not be paid back is called a perpetual or irredeemable debenture. Redeemable debentures are payable at the time of the specified time period as per the terms and conditions. These debentures can be repayed at par, premium or at a discount.

CONVERTIBLE DEBENTURES According to convertibility, debentures can de divided into three categories- • Fully Convertible Debentures • Non- Convertible Debentures • Partly Convertible Debentures

FULLY CONVERTIBLE DEBENTURES NON CONVERTIBLE DEBENTURES Those debentures that are converted into equity shares of the company on the expiry of the specified period Those debentures that can not converted into equity shares of the company

PARTLY CONVERTIBLE DEBENTURES Partly convertible portion Partly Non Convertible Portion • It is converted into equity shares of the company on the expiry of the specified period • It is redeemed at the expiry of the specified period

CHARGE ‘Charge’ is the interest of the creditor in the assets provided by the debtor as security to the former in the event of a secured loan. Charge gives a right of lien over the property to the creditor, i. e. , the creditor can have the possession of the property till the debt is fully repaid to him by the debtor. I In Companies Act 2013, Charge is defined under Section 2(16) There are two types of charges- Fixed Charge and Floating Charge

FIXED CHARGE A fixed charge is created on fixed assets like property which includes land, buildings, or anything static (which does not change) and specific. It also extends to intangible assets like trademarks, copyrights, patents etc Though the possession is with the debtor, control over the property is with the creditor. If the debtor wants to sell, buy or in any way transact on the charged asset, he/she has to obtain the prior permission of the creditor since the hold on the property lies with the creditor

FLOATING CHARGE A floating charge is created on assets which are involved in the ordinary course of business that is dynamic in nature. As these assets are not ‘fixed’ in nature, they are known as floating charges. A company may also dispose of such assets without the permission of the creditor. For example, if the security for a loan is in the form of ‘a building’, it is a fixed charge on the property for the creditor because it does not change or fluctuate in its state of being. But if the security is on goods in a warehouse, the type of charge created is a floating charge because of the dynamic nature of the assets. When a floating charge is created on such goods which are not constant and keep changing from time to time, the creditors own whatever goods are left after the actual transactions by the company.

CRYSTALLISATION OF FLOATING CHARGE i. iii. There are instances where a floating charge may become a fixed charge. This conversion of floating charge into a fixed charge is usually called Crystallisation of floating charge. When such conversion takes place, the floating charge is no more floating, even on the assets that are not static. It becomes a fixed charge so that the whole control over particular assets belong to the creditor in the event of default in repayment of debts. Such an event happens under the following circumstances: The debtor is unable to pay off the debts. The company is about to wind up. The business couldn’t be carried out when the creditor takes action against the debtor for not repaying the debts and in all such circumstances which are listed out under the relevant provisions of the Companies Act, 2013.

REMEDIES OF DEBENTURE HOLDERS According to the Rule 18 - It is the duty of the debenture trustee to communicate to the debenture holders any defaults with respect to redemption of debentures or payment of interest and any either action taken by the trustee himself. The debenture trustee will appoint a nominee director on the board of the company in case there are 2 consecutive defaults by the company in payment of interest to the debenture holder or failure in redemption of debentures. As per the section 71(8) of the Companies Act, 2013 the debenture holder is entitled to interest and redemption of debentures in accordance with the conditions of their issue. ·

Section 71(10) of the Companies Act, 2013 - If the company makes a default either in payment of interest due or in redemption of debentures on date of maturity of debentures, the Tribunal may , on application of debenture trustee and, after hearing the parties involved , direct, through order , the company to redeem the debenture with payment of principal amount as well as the interest overdue.

Further if the companies make a default in complying with the order of the tribunal, the section 71(11) of the Companies Act, 2013 provides that the tribunal shall punish the officers in default with an imprisonment which may extend to 3 years or with fine shall minimum be of 2, 000 rupees and can extend to 5, 000 rupees or both.

COMPARISON BETWEEN SHAREHOLDER AND DEBENTURE HOLDER Share Holder Member of company Shareholder has a right to vote Entitled to get dividend only out of profit In the event of winding up, shareholders cannot claim payment unless the creditors have paid in full Debenture Holder Lender of the company No right of voting with the debenture holder Entitled to a fixed rate of interest which the company has to pay irrespective out of profits Debenture holders being secured creditors have prior claim for repayment