Issue of Debentures under Section 71 of Companies Act, 2013

Section 71 of the Companies Act, 2013 (Companies Act) permits a company to 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.

Key features of debentures:

Debentures do not carry voting rights.
Debentures may be secured or unsecured.
Debentures may be convertible or non-convertible.
Debentures can be redeemable or irredeemable debentures.
Debentures carry interest at a fixed rate (which can also be a zero rate).
Issuer company needs to create a debenture redemption reserve account (“DRR”) 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.
Note: Rule 18 of theCompanies (Share Capital and Debentures) Rules 2014, provides a ten years redemption period for secured debentures. There is no redemption time frame provided for unsecured debentures.

1. A company must allot the debenture certificates within 6 months from the date of allotment.

2. Stamp duty: Stamp duty on issuance of debentures is governed by the Indian Stamp Act, 1899 and is payable at the rate of .05% per year of the face value of the debentures, subject to the maximum of 0.25% or Rs 25 lakh, whichever is lower. Eg: On debentures worth Rs. 20 Crores, stamp duty would be Rs. 1 lakh.

3. Utilisation of Funds: Pursuant to the Companies (Amendment) Act, 2017 the issuer is not permitted to utilise any monies raised through private placement till the allotment is complete and the return of allotment (Form PAS 3) is filed with the Registrar of Companies within 15 days of allotment. The requirement of keeping money in a separate bank account continues.

4. Penalty for non-compliance: The penalty under Section 42 is two-fold:

If a company defaults in filing the return of allotment within 15 days of allotment, the company, its promoters and directors shall be liable to a penalty for each default of one thousand rupees for each day during which such default continues but not exceeding twenty-five lakh rupees.
If a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount involved in the offer or invitation or two crore rupees, whichever is higher, and the company shall also refund all monies to subscribers within a period of thirty days of the order imposing the penalty.

Pros and cons of issue of debentures:

Pros	Cons
Does not alter the shareholding structure and the voting rights pattern	The issuer is not permitted to utilise any monies raised through issue of Debentures till the allotment is complete and the Return of Allotment (Form PAS 3) is filed with the Registrar of Companies within 15 days of allotment.
Rate of stamp duty is only 0.05% per year only which is much lower than the stamp duty payable on a shareholder loan.	A separate bank account to be opened and monies cannot be utilised till the Return of Allotment is filed with the ROC.
Payment of interest can be yearly.	Have to create a Debenture Redemption Reserve
No statutorily mandatory redemption/ conversion horizon for unsecured debentures
Rank in priority to equity shares, in case of a liquidation event.

Procedure for issue of Debentures:

S. No.	Particulars
1.	Convene and hold Board Meeting to pass the necessary Resolutions for issue of debentures, approving the Offer Letter, Debenture Subscription Agreement, opening of bank account and calling of the Extra-Ordinary General Meeting.
2.	Convene and hold Extra-Ordinary General Meeting to consider and approve the following items: –

a. Increase in the Borrowing powers of the Company already in place.

Additional compliances under Chapter III & V of the Securities & Exchange Board of India (Listing Obligations & Disclosure Requirements) Regulations, 2015 for listing of Non-convertible Debentures:

SEBI Compliances for listing of Non-convertible Debentures

S. No.	Particulars
1.	Appointment of Independent Directors and the constitution of `Audit Committee’ (AC) and ‘Nomination & Remuneration Committee’ (NRC).