# Manner of Issue of Debentures [Section 71]

## 1. Issue of Debentures with an Option to Convert

A company may issue debentures with an option to convert (wholly or partly) into shares at the time of redemption, provided:

A special resolution is passed at a general meeting authorising the issue.

## 2. Categories

Unsecured / Naked debentures – not secured by any mortgage or charge.
Secured debentures – secured by mortgage or charge on the property of the company. The Central Government may prescribe the procedure for security, form of trust deed, inspection of trust deed, quantum of DRR, etc.

## 3. Prohibition on Voting Rights [Section 71(2)]

No company shall issue any debentures carrying any voting rights.

## 4. Conditions for Issue of SECURED Debentures [Section 71(3) read with Rule 18(1), Companies (Share Capital and Debentures) Rules, 2014]

### (a) Maximum Tenor

Default tenor: not more than 10 years from date of issue.
Extended tenor up to 30 years permitted for:

1. Companies engaged in setting up infrastructure projects.

2. Infrastructure Finance Companies (Direction 2(1)(viia) – RBI NBFC Prudential Norms, 2007).

3. Infrastructure Debt Fund NBFCs (Direction 3(b) – RBI IDF-NBFC Directions, 2011).

4. Companies permitted by a Ministry/Department of CG, RBI, NHB or other statutory authority to exceed 10 years.

### (b) Appointment of Debenture Trustee

A debenture trustee must be appointed before issue of prospectus / letter of offer.

### (c) Security by Creation of Charge

Charge / mortgage to be created in favour of the debenture trustee on:

1. Specified movable property of the company / subsidiaries / holding / associate companies, OR

2. Specified immovable properties (wherever situate) or any interest therein.

Notes:

Value of assets charged must be sufficient for due repayment of debenture amount + interest.
For NBFCs, charge/mortgage may be created on any movable property.
For Government companies whose debentures are fully guaranteed by Central / State Government(s), the charge requirement under Rule 18(1) does not apply.

### (d) Debenture Trust Deed

Executed in Form SH-12
Within 3 months of closure of the issue / offer
Purpose: to protect the interest of debenture holders.

## 5. Summary Mnemonic for Secured Debentures (T-A-S-D)

Tenor: 10 / 30 years
Appoint debenture trustee
Security by charge / mortgage
Debenture trust deed (SH-12 within 3 months)

Worked example

### Example 1

Q. Sun Infra Ltd., engaged in setting up of a national highway, proposes to issue secured debentures with a tenor of 25 years. Is this permissible?

A. Yes. Rule 18(1) of the Companies (Share Capital and Debentures) Rules, 2014 permits tenor up to 30 years for companies engaged in setting up of infrastructure projects. Hence a 25-year tenor is valid.

### Example 2

Q. Star Ltd. issues debentures convertible into equity shares at the option of the holder at the time of redemption. The Board approved the issue. Is this sufficient?

A. No. The proviso to Section 71(1) requires the issue of debentures with an option to convert (wholly or partly) into shares to be approved by a SPECIAL RESOLUTION at a general meeting. Mere Board approval is insufficient.

⚠️ Common exam mistakes

Confusing tenor cap: the default 10-year cap applies to SECURED debentures; the 30-year cap is restricted to specified categories (infra, IFCs, IDF-NBFCs, permitted companies).
Forgetting that an ordinary resolution is NOT enough for convertible debentures – a SPECIAL resolution is required.
Overlooking the 3-month time limit for executing the debenture trust deed in Form SH-12 from closure of the issue.
Assuming NBFCs must create charge only on specified movable property. They are permitted to create charge on ANY movable property.

Bare-Act text Section 71(1)-(3) · The 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. (2) No company shall issue any debentures carrying any voting rights. (3) Secured debentures may be issued by a company subject to such terms and conditions as may be prescribed.

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →

Issue of Debentures – Manner & Conditions [Section 71]

Worked example

⚠️ Common exam mistakes