Debenture Companies Act, 1956 Borrowing Powers of a Company The Companies Act does not expressly empower companies

to borrow money, and therefore, most of the companies expressly provide for such borrowing powers in the Memorandum and articles. In such cases, where Memorandum and articles of association authorises the company to borrow, they alao provide as to how and by whom these powers shall be exercised. It may also fix up the maximum -amount which can be borrowed by the company. The power to borrow money is generally exercised by the directors but Articles normally provide for certain restrictions on their power to borrow, to the aggregate of the paid-up capital of the company and its free reserves. The company shall not, except with the consent of such public company or subsidiary in general meeting, borrow moneys where the moneys to be borrowed, together with the moneys already borrowed by the company (apart from temporary loans obtained from the company's bankers in the ordinary course of business) will exceed the aggregate of paid up capital of the company and its free reserves, ( free reserves that is to say reserves not set apart for any specific purpose) Debenture The term debenture' simply means a document acknowledging a loan made to a company and providing for the payment of interest on the sum borrowed until the debenture is redeemed, i.e., the repayment of the principal sum. Since the debenture are secured funds the charge is created on the assets of the company. Kinds of debenture Bearer Debentures By making debenture repayable to bearer they are invested with the character of a negotiable instrument, so as: 1. to make them transferable free from equities; 2. to render the delivery of a debenture and any interest coupon a good discharge to the company; 3. to enable the bearer to sue the company in his own name, if necessary;

to ensure a good title to any person who acquires the debenture bonafide for consideration, notwithstanding any defect in the title of the person from whom he acquires it." The interest on 'bearer debentures' is paid by means of attached coupons. On maturity the principal sum is paid to the bearer.
4.

2. Registered Debentures These are debentures which are payable to the registered holders, i.e., persons whose names appear in the register of debentures. Such debentures are transferable in the same way as shares are in accordance with the conditions endorsed on their back. The debenture itself consists of two parts:
3.

Perpetual or Irredeemable Debentures

A debenture which contains no clause as to payment or which contains a clause that it shall not be paid back is called a Perpetual or Irredeemable debenture. Section 120 of the Companies Act provides that a condition contained in any debenture is not invalid by reason only that thereby, the debentures are made irredeemable or redeemable only on the happening of a contingency, however remote, or on the expiration of a period, however long. It follows that debentures can be made perpetual, i.e., the loan is repayable only on winding up, or after a very long period of time.
4.

Redeemable Debentures

Redeemable debentures are issued for a specified period of time. On the expiry of that specified time the company has the right to pay back the debenture holders and have its properties released from the mortgage or charge. Generally, debentures are redeemable.
5.

Convertible Debentures

A company may also issue convertible debentures, in which case an option is given to the debentureholders to convert them into equity or preference share at stated rates of exchange, after a certain period. Debenture Certificate Section 113 requires the debenture certificate to be issued within 3 months of the allotment. In case of transfer, the same must be issued within 2 months after the application for transfer. CLB may extend the aforesaid period but not beyond 9 months, if it is satisfied that it is not possible for the company to deliver the certificate within the said period.

Debenture trustee and trustdeed: The Companies (Amendment) Act, 2000 has added two new Sections, viz., 117A and 117B relating to debentures trust-deed and debenture trustees. Section 117A stipulates that a trust deed for securing any issue of debentures shall be in such form and shall be executed within such period as may be prescribed. It may be noted that SEBI Guidelines, 2000 specify a period of six months from the closure of the issue for listed companies. Inspection and copy of trust deed Sub-section (2) of Section 117A empowers any member or debentureholder of the company to inspect the trust deed and obtain copies of the same on payment of the prescribed amount. Penalty for non-compliance If inspection of trust deed or copy of the trust deed is not made available to any member or debentureholder of a company, the company and every officer of the company, who is in default, shall be punishable, for each offence, with fine which may extend to Rupees five thousand hand for each day during which the offence continues. Appointment of Debenture Trustee (Section 117B) A company before issue of a prospectus or a letter of offer to the public for subscription of its debentures is required to fulfill the following conditions: (i) to appoint one or more debenture trustee for such debentures; (ii) to state on the face of the prospectus or letter of offer that the debenture trustee or trustees have given their consent to be so appointed. Restrictions on the appointment of a debenture trustee A person cannot be appointed as a debenture trustee, if he (a) beneficially holds shares in the company; (b) is beneficially entitled to moneys which are to be paid by the company to the debenture trustee; (c) has entered into any guarantee in respect of principal debts secured by the debentures or interest thereon. Functions of the debenture trustee Section 117B (2) lays down that, subject to the provisions of the Act, the functions of the debenture trustee shall generally be to protect the interest of holders of debentures (including creation of securities within the stipulated time); or to redress the grievances of holders of debentures effectively.

to ensure that the assets of the company issuing debentures and each of the guarantors are sufficient to discharge the principal amount of the debentures at all times; to satisfy himself that the prospectus or letter of offer does not contain any

matter which is inconsistent with the terms of the debentures or with the trust deed; to ensure that the company does not commit any breach of covenants and provisions of the trust deed; to take reasonable steps to remedy any breach of the covenants of the trust deed or the terms of issue of debentures; to take steps to call a meeting of holders of debentures as and when such meeting is required to be held. To appoint a nominee director on the Board of directors of a company, in the event of two consecutive defaults in payment of interest on debentures or default in creation of security for debentures or redemption of debentures. To send communication to debenture-holders on a half-yearly basis in respect of compliance of terms of issue by the company, as also defaults made by the company, if any, in payment of interest or redemption amount and action taken Debenture Redemption Reserve (DRR) (Section 117C) Section 117C, introduced by the Companies (Amendment) Act, 2000 provides for creation of Debenture Redemption Reserve for the purpose of redemption of debentures. It may, however, be noted that SEBI Guidelines have since long stipulated such requirement. The provisions of Section 117C, in this regard, are:

1. In respect of debentures issued after the commencement of the Amendment Act, 2000 the company is required to create a debenture redemption reserve for the redemption of such debentures. 2. The company shall credit the DRR adequate amounts from out of its profits every year until such debentures are redeemed. 3. DRR shall be utilised by the company only for the purpose of redemption of debentures . 4. The company shall pay interest and redeem the debentures in accordance with the terms and conditions of their issue. 5. Failure to redeem the debentures If a company fails to redeem the debentures on the due dates, any or all the debentureholders can make an application to CLB. CLB, after hearing the parties concerned, may direct, by order, the company to redeem the debentures forthwith by payment of principal and interest due thereon. 6. Penalty for non-compliance Every officer of the company who is in default

shall be punishable with imprisonment which may extend to three years and shall also be liable to fine which shall not be less than rupees five thoshands for every day during which the default continues. Debenture issued by Tata- motors Tata Motors Ltd, India's leading vehicles maker, has raised 42 billion rupees ($884 million) through an issue of non-convertible rupee debentures, the company said. The funds will be used to partly repay a $3 billion bridge loan Tata Motors had raised last year to acquire marquee brands Jaguar and Land Rover, It had already repaid $1.11 billion of the loan and the remainder is due for repayment on June 2. Citigroup and Tata Capital were the lead arrangers for the issue. Denbenture issued by HDFC The countrys largest housing finance company, Housing Development Finance Corporation (HDFC), today said it had received approval of its directors to raise up to Rs 4,000 crore through qualified institutional placement (QIP) of secured redeemable non-convertible debentures (NCDs) and warrants.

Srei Infrastructure Finance plans to raise Rs 1,000 crore ($200 million) in the current fiscal year through non convertible debentures