# Issue and Redemption of Debentures (Sec 71)

Section 71 governs how a company issues, secures, and ultimately redeems debentures, and lays down the framework for debenture trustees who protect holders' interests.

## 1. Convertible Debentures

Company may issue debentures with an option to convert (wholly or partly) into shares at redemption.
Issue of convertible debentures requires a special resolution at a general meeting.
Debentures do NOT carry voting rights [Sec 71(2)].

## 2. Secured Debentures

Maximum redemption period: 10 years from issue date.
Extended tenor up to 30 years for:
Infrastructure project companies
Infrastructure Finance Companies
Infrastructure Debt Fund NBFCs
Companies permitted by regulatory authorities (Central Govt Ministry/Dept, RBI, NHB, or other statutory authority)
A charge is created on the company's assets in favour of the debenture trustee.

## 3. Borrowing Limits via Debentures [Sec 180(1)(c)]

If debenture borrowings exceed (PUSC + FR + SP) → Special Resolution required
If within the limit → Board Resolution sufficient
Note: Temporary loans from banks are NOT counted as borrowings

## 4. Debenture Trustee — Mandatory When?

Appoint if debentures issued to public or to members exceeding 500.

### Procedural Steps

Obtain written consent before appointment
Execute Debenture Trust Deed (Form SH-12) within 3 months of closure of issue

### Disqualifications for Trustee

The following cannot be debenture trustees:

A beneficiary holding shares in the company
A promoter, director, KMP, officer, or employee of the company / holding / subsidiary / associate
A relative of any promoter, director, or KMP
A beneficiary entitled to receive payments from the company (except remuneration as trustee)
Anyone indebted to the company or its group
Anyone who guaranteed the principal debt or interest
Anyone with pecuniary relationship of:
2% or more of gross turnover/total income, OR
₹50 lakh or more (or higher as prescribed)
During 2 immediately preceding FYs or current FY

### Vacancies and Removal

Casual vacancy: Filled by Board; if caused by resignation, requires approval of majority debenture holders
Removal: Requires 3/4th approval of debenture holders
Meetings: Trustee may convene meetings on request of holders of 1/10th value to address grievances/breaches
Exemption clauses: Terms exempting trustee liability for breach of trust are void, unless approved by 3/4th of debenture holders

## 5. Redemption and Enforcement

Company must pay interest and redeem per terms.
If assets are insufficient → trustee may petition Tribunal to restrict further liabilities.
If company fails to redeem at maturity or pay interest → Tribunal may order immediate redemption and payment.
A contract to take and pay for debentures is enforceable by decree of specific performance.

## 6. Central Government's Rule-Making Powers

The CG may prescribe procedures for:

(a) Securing the issue of debentures
(b) Form of debenture trust deed
(c) Inspection and copies of trust deed
(d) Quantum of Debenture Redemption Reserve

Worked example

### Example 1

Example 1 (Tenor): An infrastructure finance company plans to issue secured debentures with a 25-year redemption period. Is this allowed?

Answer: Yes. The default cap of 10 years is extended to 30 years for infrastructure finance companies (and similar specified entities). A 25-year tenor is permissible.

### Example 2

Example 2 (Trustee Disqualification): Mr A holds 0.5% shares in the issuing company and his brother is a KMP. Can Mr A be appointed as debenture trustee?

Answer: No. Mr A is disqualified on two counts: (i) he is a beneficiary holding shares, and (ii) he is a relative of a KMP. Either ground is sufficient to disqualify him.

### Example 3

Example 3 (Trustee Removal): A company has 1,000 debenture holders. How many must approve to remove the existing debenture trustee?

Answer: Removal requires 3/4th approval of debenture holders = 750 holders (or 3/4th by value, as the relevant resolution prescribes).

### Example 4

Example 4 (Trust Deed Timeline): A company closes its debenture issue on 1st March 2024. By when must the trust deed (Form SH-12) be executed?

Answer: Within 3 months of closure, i.e., by 1st June 2024.

⚠️ Common exam mistakes

Assuming all debentures have a 10-year cap — forgetting the 30-year exception for infrastructure and related companies.
Confusing the trigger for trustee appointment — it kicks in for public issues OR private issues to more than 500 members.
Treating the trustee disqualification list as exhaustive of major persons only — even a relative of a director/KMP is disqualified.
Confusing the 1/10th threshold (to request a meeting) with the 3/4th threshold (to remove a trustee or approve exemption clauses).
Forgetting that issue of CONVERTIBLE debentures requires a special resolution (not just board approval).
Treating temporary bank loans as borrowings for the Sec 180(1)(c) limit calculation — they are excluded.

Bare-Act text Section 71 · Companies Act, 2013 · click to expand

Section 71(1): A company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption: Provided that the issue of debentures with an option to convert such debentures into shares, wholly or partly, shall be approved by a special resolution passed at a general meeting. Section 71(2): No company shall issue any debentures carrying any voting rights. Section 71(5): No company shall issue a prospectus or make an offer or invitation to the public or to its members exceeding five hundred for the subscription of its debentures, unless the company has, before such issue or offer, appointed one or more debenture trustees.

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Issue and Redemption of Debentures, Debenture Trustees (Sec 71)

Worked example

⚠️ Common exam mistakes