# Debentures (Section 71)
## What is a Debenture?
A debenture includes debenture stock, bonds, or any other instrument evidencing debt, whether secured or unsecured.
Excludes:
- Instruments referred to in Chapter III-D of the RBI Act, 1934, and
- Instruments prescribed by Central Government in consultation with RBI.
## Key Issuance Rules
1. Convertible Debentures: A company may issue debentures with an option to convert into shares only if authorised by Special Resolution (SR) at the time of issue. No further approval is required at conversion.
2. No Voting Rights: Debentures cannot carry voting rights under any circumstances.
## Debenture Trustee — Who Protects Debenture Holders?
### When Must a Trustee Be Appointed?
| Situation | Trustee Required? |
|---|---|
| Prospectus / public offer for debentures | ✓ Yes |
| Offer/invitation to more than 500 members | ✓ Yes |
| Issue of secured debentures | ✓ Yes |
Appointment must be made before issue of the prospectus or offer.
### Consent & Disclosure
- Written consent must be obtained before appointment.
- The trustee's name must appear in the offer letter/notice.
### Disqualifications (Who CANNOT Be Debenture Trustee?)
- Beneficial holder of shares in the company (even if not registered),
- Promoter, Director, KMP, Officer or Employee of company or its CASH (associate, subsidiary, holding company) entities,
- Relative of promoter/director/KMP,
- Person beneficially entitled to money from the company (other than remuneration as trustee),
- Person indebted to CASH entities,
- Person who has furnished guarantee for principal of debentures or interest,
- Person with pecuniary relationship with the company (in last 2 FYs + current FY) exceeding lower of: 2% of gross turnover/total income OR ₹50 lakhs.
### Duties
- Take steps to protect interests of debenture holders and redress grievances.
- Convene meeting of debenture holders on:
- Request by holders of at least 1/10th value of debentures, OR
- Happening of an event constituting breach, default, or affecting their interest.
### Petition with NCLT
If the trustee concludes that assets are/likely to be insufficient to discharge principal, the trustee may file petition with NCLT, which may restrict the company from incurring further liabilities.
### Liability of Trustee
- Any provision in the trust deed exempting the trustee from liability for failure of care/diligence is void.
- Such exemption is valid only if approved by holders of at least 75% value of debentures at a meeting.
### Removal & Vacancy
| Event | Mechanism |
|---|---|
| Removal before term | Approval by holders of not less than 3/4th value of outstanding debentures |
| Casual vacancy | Board fills it directly |
| Vacancy by resignation | Board fills it WITH written consent of majority (in number) of debenture holders |
## Secured Debentures — Conditions
| Condition | Rule |
|---|---|
| Tenor | Max 10 years from date of issue |
| Extended tenor up to 30 years for | Infrastructure Project Cos., Infrastructure Finance Cos., Infrastructure Debt Fund NBFCs, Cos. permitted by CG/RBI/NHB/statutory authority |
| Charge | Created on specific movable/immovable property of CASH company; value sufficient for principal + interest; in favour of debenture trustee |
| Trust Deed | Form SH-12, executed within 3 months of closure of issue |
> Exemption: Govt. company debentures secured by CG/SG guarantee are exempt from charge creation.
## Debenture Certificate
Issued under common seal OR signature of a director + CS (if appointed), or 2 directors.
## Return of Allotment
Form PAS-3 filed with ROC within 30 days of allotment.
## NCLT Power on Default
If the company fails to redeem on maturity or fails to pay interest on due date, debenture holders/trustee may apply to NCLT, which may order the company to redeem forthwith with principal and interest.
## Debenture Redemption Reserve (DRR)
### Who Must Create DRR?
| Required to Create DRR | Exempt |
|---|---|
| Unlisted companies (general) | NBFCs (RBI registered) & HFCs (NHB registered) — in case of private placement |
| All India Financial Institutions (AIFI) and Banking Companies | |
| All listed companies |
### Amount
DRR = 10% of outstanding debentures (created out of profits available for dividend).
> For partly convertible debentures, DRR is created only on the non-convertible portion.
### Use
Amount in DRR shall NOT be utilised except for redemption of debentures.
## Investment/Deposit for Debentures Maturing in FY
### Requirement
By 30 April of each year, required companies must invest/deposit an amount equal to 15% of debentures maturing during the FY in:
- Scheduled bank deposits (free from charge/lien),
- Unencumbered CG/SG securities,
- Unencumbered securities specified under Indian Trusts Act, 1882.
### Who Must Comply?
| Publicly Placed Debentures | Privately Placed Debentures |
|---|---|
| All listed AND unlisted companies (other than AIFI & banking companies) | Unlisted companies only [except AIFI, banking cos., RBI-registered NBFCs, NHB-registered HFCs] |
## Special Resolution u/s 180(1)(c)
If the amount raised through debentures + existing borrowings exceeds [Paid-up share capital + Free reserves + Securities premium], the company must pass SR.
Excluded from 'borrowing': Temporary loan (repayable on demand or within 6 months, e.g., cash credit) from bank in ordinary course, NOT raised for capital expenditure.
> Section 180(1)(c) does NOT apply to private companies.