Debenture Issue
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Debenture Issue


Section 71 of the Act enables that a company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption. 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. The section prohibits issue of debentures carrying voting rights.

A company may issue secured debentures subject to such terms and conditions as may be prescribed. The rules in this regard provide that no company shall issue secured debentures unless it complies with the following conditions:

(a) an issue of secured debentures may be made, provided the date of its redemption shall not exceed 10 years from the date of issue. A company engaged in the setting up of infrastructure projects may issue secured debentures for a period exceeding ten years but not exceeding thirty years;

(b) such an issue of debentures shall be secured by the creation of a charge, on the properties or assets of the company, having a value which is sufficient for the due repayment of the amount of debentures and interest thereon;

(c) the company shall appoint a debenture trustee before the issue of prospectus or letter of offer for subscription of its debentures and not later than 60 days after the allotment of the debentures, execute a debenture trust deed to protect the interest of the debenture holders ; and

(d) security for the debentures by way of a charge or mortgage shall be created in favour of the debenture trustee on-

(i) any specific movable property of the company (not being in the nature of pledge), and/or

(ii) any specific immovable property wherever situate, or any interest therein.

The section provides that 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. In simple terms the company shall not issue prospectus to more than 500 hundred persons without appointing debenture trustee.