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Debentures and Securities in Indian Company Law

Introduction​

Debentures and securities play a crucial role in the financing structure of companies in India. This guide provides an overview of the key aspects of debentures and securities under Indian company law, focusing on the Companies Act 2013.

Definition and Types of Debentures​

A debenture is a type of debt instrument issued by a company to raise capital from investors. There are two main types of debentures:

  1. Registered Debentures: These are registered in the name of the holder and represent ownership of a specific amount of debt owed by the company.

  2. Bearer Debentures: These are transferable by delivery and do not have the name of the owner printed on them.

"A debenture means debenture as defined in clause (a) of sub-section (1) of section 2 of the Public Financial Institutions (Repeal and Miscellaneous Provisions) Act, 1989."

Issuance of Debentures​

Companies must comply with several requirements when issuing debentures:

  1. Creation of a debenture trust deed
  2. Appointment of debenture trustees
  3. Creation of a debenture redemption reserve fund
  4. Compliance with prospectus requirements

Case Study: In Re: M/s. Kesoram Industries Ltd. [2006] 101 Comp Cas 1 (Cal)​

This case established that the issue of unsecured loan notes without creating a debenture redemption reserve fund was invalid.

Legal Reference: Section 71 of the Companies Act 2013 requires the creation of a debenture redemption reserve fund before issuing any secured debentures.

Security for Debentures​

Secured debentures require additional security measures:

  1. Creation of a charge on the company's assets
  2. Registration of the charge with the Registrar of Companies
  3. Filing of the charge creation document with the company registrar

Case Study: M/s. Tata Iron & Steel Co. Ltd. v. M/s. Kesoram Industries Ltd. [1999] 92 Comp Cas 1 (Bom)​

This case established that a floating charge on current assets was not valid security for debentures under Section 390 of the Companies Act 1956.

Legal Reference: Section 77A of the Companies Act 2013 deals with the registration of charges.

Public Issue of Debentures​

Companies issuing debentures publicly must comply with prospectus requirements:

  1. Preparation of a prospectus
  2. Registration of the prospectus with the Registrar of Companies
  3. Compliance with disclosure requirements

Redemption of Debentures​

Companies must redeem debentures according to the terms specified in the debenture deed:

  1. Creation of a debenture redemption reserve fund
  2. Payment of interest at the rate specified in the deed
  3. Repayment of the principal amount

Case Study: M/s. Gujarat Narmada Valley Construction Co. Ltd. v. M/s. State Bank of India [2005] 122 Comp Cas 1 (SC)​

This case established that the failure to create a debenture redemption reserve fund before issuing secured debentures was invalid.

Legal Reference: Section 71(1)(a) of the Companies Act 2013 requires the creation of a debenture redemption reserve fund before issuing any secured debentures.

Securities​

Securities refer to various financial instruments issued by companies to raise capital:

  1. Equity shares
  2. Preference shares
  3. Convertible debentures
  4. Warrants

"Securities means debentures, stocks, bonds, promissory notes, certificates of deposit or other marketable securities of a like nature in India, but does not include money."

Conclusion​

Understanding debentures and securities is crucial for law students and LLB students studying corporate law. This guide provides an overview of the key concepts and legal requirements governing these financial instruments in India. It's important to note that this area of law is constantly evolving, so it's advisable to consult recent case laws and legislative changes for the most up-to-date information.