Imagine Rajesh & Co. Pvt. Ltd. needs ₹10 crores for expansion but doesn't want to dilute equity right away. They issue debentures — essentially a formal loan from the public, documented and regulated under Section 71 of the Companies Act, 2013. This section lays down the complete rulebook for how companies can issue, manage, and redeem debentures.
The most exam-tested rule here is about Debenture Redemption Reserve (DRR). When a company issues debentures, it must create a DRR account from profits available for dividend. This money is ring-fenced — it can only be used to redeem those debentures. Think of it as a sinking fund the company is forced to build up so it doesn't default. Next, if the company is offering debentures to more than 500 people (public or members), it must appoint a Debenture Trustee before the issue. The trustee's job is to protect debenture-holders' interests — and importantly, a trust deed cannot exempt the trustee from liability for breach of trust (though 75% of debenture-holders by value can agree to specific exemptions at a meeting).
A few bright-line rules to memorize: (1) Debentures can carry a conversion option (into shares, fully or partly at redemption), but this needs a Special Resolution at a General Meeting. (2) Debentures can never carry voting rights — this is absolute, no exceptions. (3) If the company fails to redeem or pay interest, the Tribunal (NCLT) can step in — either on the trustee's petition (if assets look insufficient) or on the debenture-holders' application. (4) A contract to subscribe to debentures is specifically enforceable — meaning a court can force actual performance, not just award damages. This is a frequently tested 4–5 mark question, especially the DRR rule and the trustee appointment threshold.
📊 Worked example
Example 1 — Does Sharma Ltd. need a Debenture Trustee?
Shares Ltd. plans to issue Non-Convertible Debentures (NCDs) to raise funds. It has identified 480 investors from its existing member base. Later, it decides to extend the offer to 30 more members, taking the total to 510 investors.
Working:
- Threshold under Sec 71(5): More than 500 persons → Debenture Trustee mandatory
- First plan (480 persons): 480 ≤ 500 → No trustee required
- Revised plan (510 persons): 510 > 500 → Trustee must be appointed BEFORE the issue
Answer: Yes, Sharma Ltd. must appoint a Debenture Trustee before proceeding with the revised offer.
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Example 2 — Convertible Debentures & Special Resolution
Ms. Iyer is the CFO of Prestige Infra Ltd. The Board wants to issue ₹5,00,00,000 (₹5 crores) worth of debentures with an option for holders to convert them into equity shares at redemption. The Board passes a resolution at its meeting approving this.
Working:
- Sec 71(1) requires a Special Resolution at a General Meeting (i.e., shareholder approval)
- A Board Resolution alone is not sufficient
- Special Resolution = passed by votes in favour ≥ 3× votes against
Answer: The issue is invalid. Prestige Infra Ltd. must pass a Special Resolution at a General Meeting — the Board Resolution is insufficient. Ms. Iyer should immediately convene a GM.
⚠️ Common exam mistakes
- Confusing Board Resolution with Special Resolution for convertible debentures. Students often write that a Board Resolution suffices — it doesn't. Sec 71(1) explicitly requires a Special Resolution at a General Meeting. Board approval is irrelevant here.
- Thinking debentures can carry voting rights in special circumstances. There are NO exceptions to Sec 71(2). Debentures cannot carry voting rights, period. Don't invent exceptions in the exam.
- Forgetting the 500-person threshold for Debenture Trustee. The trigger is exceeding 500 — so exactly 500 does NOT require a trustee. Only 501+ does. Read the question's numbers carefully.
- Writing that DRR can be used for general business purposes. The DRR is locked — it can only be used for redemption of debentures. Using it for anything else violates the section.
- Missing that a debenture subscription contract is specifically enforceable. Students skip Sec 71(12) in revision. It's a short but direct exam question — a contract to take up debentures can be enforced by a decree for specific performance, not just monetary damages.
📖 Bare Act text — Section 71, Companies Act 2013
(click to expand)
(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. (4) Where debentures are issued by a company under this section, the company shall create a debenture redemption reserve account out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilised by the company except for the redemption of debentures. (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 and the conditions governing the appointment of such trustees shall be such as may be prescribed. (6) A debenture trustee shall take steps to protect the interests of the debenture-holders and redress their grievances in accordance with such rules as may be prescribed. (7) Any provision contained in a trust deed for securing the issue of debentures, or in any contract with the debenture-holders secured by a trust deed, shall be void in so far as it would have the effect of exempting a trustee thereof from, or indemnifying him against, any liability for breach of trust, where he fails to show the degree of care and due diligence required of him as a trustee, having regard to the provisions of the trust deed conferring on him any power, authority or discretion: Provided that the liability of the debenture trustee shall be subject to such exemptions as may be agreed upon by a majority of debenture-holders holding not less than three-fourths in value of the total debentures at a meeting held for the purpose. (8) A company shall pay interest and redeem the debentures in accordance with the terms and conditions of their issue. (9) Where at any time the debenture trustee comes to a conclusion that the assets of the company are insufficient or are likely to become in sufficient to discharge the principal amount as and when it becomes due, the debenture trustee may file a petition before the Tribunal and the Tribunal may, after hearing the company and any other person interested in the matter, by order, impose such restrictions on the incurring of any further liabilities by the company as the Tribunal may consider necessary in the interests of the debenture-holders. (10) Where a company fails to redeem the debentures on the date of their maturity or fails to pay interest on the debentures when it is due, the Tribunal may, on the application of any or all of the debenture-holders, or debenture trustee and, after hearing the parties concerned, direct, by order, the company to redeem the debentures forth with on payment of principal and interest due thereon. (12) A contract with the company to take up and pay for any debentures of the company may be enforced by a decree for specific performance. (13) The Central Government may prescribe the procedure, for securing the issue of debentures, the form of debenture trust deed, the procedure for the debenture-holders to inspect the trust deed and to obtain copies thereof, quantum of debenture redemption reserve required to be created and such other matters.
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Practice questions on this section, AI-graded with citations.
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