Chapter - 4 Issue of Debenture

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Q.1 A) Select the correct answer from the options given below and rewrite the statements.

1. A company cannot issue .................. with voting rights.

a) Equity shares

b) Debentures

c) Securities

Ans: b) Debenture

2. A company can issue .................. convertible debentures.

a) Only partly

b) Only fully

c) Partly or fully

Ans: c) Partly or fully

3. Money from .................. Account is used for redemption of debentures

a) Capital

b) Debenture Redemption Reserve

c) Profit or loss

Ans: Debenture Redemption Reserve

4. .................. protects the interest of debenture holders

a) Debenture Trustees

b) Debenture holders

c) Redemption Reserve

Ans: a) Debenture Trustees

5. Secured debentures must be redeemed within .................. from the date of its issue

a) 10 days

b) 10 years

c) 15 years

Ans: 10 days

6. A company issuing .................. debenture must create a charge on the assets of the company.

a) Secured

b) Unsecured

c) Redeemable

Ans: Secured

7. Debenture certificate must be issued within .................. of allotment of debentures.

a) 3 months

b) 6 months

c) 60 days

Ans: 6 months

8. The details of allotment of Debentures must be entered in .................. .

a) Register of debenture

b) Register of members

c) Register of creditors

Ans: a) Register of debenture

9. A company which issues prospectus or invites more than 500 persons to buy its debenture has to appoint .................. .

a) Register of companies

b) Debenture holders

c) Debenture trustees

Ans: c) Debenture trustees

10. The contract between company and Debenture trustees of companies is called as ..................

a) Debenture trust deed

b) Letter of offer

c) Prospectus

Ans: a) Debenture trust deed

11. Procedure for allotment of Debenture should be completed within .................. from the date of receipt of applications.

a) 6 months

b) 3 months

c) 60 days

Ams: c) 60 days

B. (I) Match the Pairs

Group A

Group B

a)

Debenture Trustees

1

Power to issue debentures

b)

Debenture holders

2

Protects interest of shareholders

c)

Charge on assets

3

Secured debentures

d)

Board of Directors

4

NCLT

e)

Debenture certificate

5

No voting rights

6

Unsecured debentures

7

Protects interest of debenture holders

8

Voting rights

9

Proof of ownership of shares

10

Issued within 6 months of allotment of debentures

Ans:

Group A

Group B

a)

Debenture Trustees

7

Protects interest of debenture holders

b)

Debenture holders

5

No voting rights

c)

Charge on assets

3

Secured debentures

d)

Board of Directors

1

Power to issue debentures

e)

Debenture certificate

10

Issued within 6 months of allotment of debentures

C) Write a word or a term or a phrase which can substitute each of the following statements.

1. Type of resolution needed to issue convertible debentures.

Ans: Special Resolution

2. Account to be created for redemption of debentures.

Ans: Debenture Redemption Reserve

3. Institution appointed by company to protect the interest of debenture holders.

Ans: Debenture trustees

4. Period within which secured debentures should be redeemed.

Ans: 10 years

5. Type of debentures on which company has to create a charge on its assets.

Ans: Secured Debenture

6. The document which contains terms and conditions agreed upon by the company and the Debenture trustees.

Ans: Debenture trust deed

7. Time period within which the procedure for allotment of debenture is to be completed from the date of receipt of applications.

Ans: 60 days

8. Period within which debenture certificate must be issued by a company.

Ans: 6 months from allotment of debenture

9. Institution which redresses grievances of debenture holders.

Ans: Debenture trustees

10. Authority which has power to issue debentures.

Ans: board of directors

D) State whether the following statements are true or false.

1. Debenture holders have no voting rights.

Ans: True

2. Company cannot issue non-convertible debentures.

Ans: False

3. Special Resolution is needed to issue convertible debentures.

Ans: True

4. Debentures holders are paid interest.

Ans: True

5. Debenture Trustees can not approach NCLT to redress grievances of debenture holders..

Ans: False

6. All secured debentures should be redeemed within 20 years from date of its issue.

Ans: False

7. Company has to create a charge on its assets when it issues secured debentures.

Ans: True

8. Debenture trustees are appointed to protect the interest of shareholders.

Ans: False

9. Debenture certificate is issued within 6 six months of allotment of debentures.

Ans: True

10. After allotment of Debentures their names are entered in the register of members.

Ans: False

E) Find the odd one.

1. Debenture holders, Interest, Dividend.

Ans: Debenture holders

2. Debenture Trustees, Court, NCLT.

Ans: Court

3. Secured Debentures, Convertible debentures, Irredeemable debentures.

Ans: Irredeemable Debenture

4. Debenture trustees, Trust Deed, Shareholders.

Ans: Shareholders

F) Complete the sentences.

1. A legal instrument conveying the assets of a company to the Debenture trustees is called .......................... .

Ans: Debenture trust deed

2. To protect the interest of Debenture holders, a company appoints .......................... .

Ans: Debenture trustees

3. On receipt of application and money, the procedure for allotment of debentures should be completed within .......................... .

Ans: 60 days

4. Authority to create charge on company’s assets is with the .......................... .

Ans: Board of directors

5. Secured debentures should be redeemed within .......................... .

Ans: 10 years from the date of issue

6. To stop a company from incurring further liabilities, the Debenture trustee can approach .......................... .

Ans: NCLT

7. A company which issues prospectus or invites more than 500 persons to subscribe for its debentures, has to appoint .......................... .

Ans: debenture trustees

8. Return on investment on debenture is called .......................... .

Ans: Interest

9. For public issue of debentures of ` 100 crores, minimum subscription should be ...................

Ans: 75% of the issue

10. For public issue or rights issue of convertible debentures, as per SEBI, a company must obtain .......................... .

Ans: Credit Rating

G) Select the correct option from the bracket

Group ‘A’	Group ‘B’
a) Debenture Trustees	1) ------------
b) -----------	2) Charge on assets
c) Register of Debenture	3) ---------
d) -----------	4) Debenture certificate
e) No voting rights	5) -----------

(Issued within 6 months of allotment, Names of debentureholders, Secured debentures, Trust deed, Debenture holders.)

Ans:

Group ‘A’	Group ‘B’
a) Debenture Trustees	1) Trust Deed
b) Secured Debentures	2) Charge on assets
c) Register of Debenture	3) Names of debenture holders
d) Issued within 6 months of allotment	4) Debenture certificate
e) No voting rights	5) Debenture holders

H) Answer in one sentence.

1. Who are debenture holders ?

Ans: Debenture holders are the creditors of the company.

2. What do debenture holders receive as return on investment ?

Ans: Debenture holders receive interest as return on investment.

3. Whom does the company appoint to protect the interest of debenture holder ?

Ans: To protect interest of debenture holders company appoint Debenture trustees.

4. Within what period should secured debentures be redeemed ?

Ans: Secured debenture should be redeem within 10 years from the date its issue.

5. Name the document which is an agreement between the debenture trustee and company.

Ans: Debenture trust deed is agreement between the debenture trustees and company.

6. Who has the authority to create charge on assets of a company ?

Ans: Board of the directors has the power to create charges over assets of a company.

7. Name the meeting in which approval for increasing the borrowing powers of Board of directors is passed.

Ans: The meeting in which approval for increasing the borrowing powers of Board of Directors is passed is known as Extra-ordinary General Meeting (EGM).

8. Within what period should the debenture certificate be issued ?

Ans: Debenture certificate should be issued within 6 months from the date of its allotment.

9. What is the minimum subscription that a company must collect for an issue of debentures of Rs 100 crores ?

Ans: The minimum subscription that a company must collect for an issue of debentures of Rs. 100 crores is 75% of the issue.

10. When should a company appoint a credit rating agency ?

Ans: A company should appoint a credit rating agency before it issues debentures.

I) Correct the underlined word and rewrite the following sentences :

1. The details of debenture holder are entered in Register of Members.

Ans: The details of debenture holder are entered in Register of Debenture holders.

2. Secured debentures must be redeemed within 15 years from the date of its issue.

Ans: Secured debentures must be redeemed within 10 years from the date of its issue.

3. A company issuing irredeemable debentures must create a charge on assets of the company.

Ans: A company issuing Secured debentures must create a charge on assets of the company.

4. Return on investment on debentures is dividend.

Ans: Return on investment on debentures is interest.

5. Debenture Trustees redress the grievances of shareholders.

Ans: Debenture Trustees redress the grievances of Debenture holders.

6. Debenture certificates are issued within 3 months of allotment of debentures.

Ans: 6. Debenture certificates are issued within 6 months of allotment of debentures.

7. Procedure for allotment of debentures should be completed within 90 days from date of receipt of applications.

Ans: Procedure for allotment of debentures should be completed within 60 days from date of receipt of applications.

8. To rate its debentures a company appoints underwriters.

Ans: To rate its debentures a company appoints Credit rating Agency.

J. Arrange in proper order.

1. a. Obtain Credit Rating.

b. Entry in register of debenture

c. Receive application with money

Ans:

a. Obtain Credit Rating.

c. Receive application with money

b. Entry in register of debenture

2. a. Issue debenture certificate

b. Issue prospectus

c. Open bank Account

Ans:

c. Open bank Account

b. Issue prospectus

a. Issue debenture certificate

3. a. Hold Board Meeting for allotment

b. Issue debenture certificate

c. Receive application with money

Ans:

c. Receive application with money

a. Hold Board Meeting for allotment

b. Issue debenture certificate

Q.2 Explain the following terms/concepts.

1. Debenture certificate

Ans: Debenture certificate is a formal document that certificates that the holder of the company. It normally contains the terms and conditions regarding payment of interest, period of debentures repayment, etc. company has to issue Debenture certificate to the debenture holders within 6 months of allotment of debentures, Debenture certificate are prepared by the secretary, signed by at least two Directors and issued under common seal.

2. Debenture trustee

Ans: Debentures Trustees are institutions which protect the interest of the debenture holders. The Trustees become the custodian of the assets on which charge has been created.

A company which issues prospectus or invites more than 500 persons to buy its debentures has to appoint one or more Debenture Trustees. Companies issuing secured debentures also must appoint Debentures Trustees.

3. Charge on assets

Ans: Company has to create a charge on the assets of the company or its subsidiary company or holding company. The value of charge should be adequate to cover the entire value of debentures issued and interest to be paid on it.

If a Government company issues secured debentures which has Central or State Government’s guarantee, then it need not create any charge on its assets.

4. Debenture trust deed

Ans: Company enters into a contract with one or more Debenture Trustees. The terms and conditions of the agreement is written in the Debenture Trust Deed. It is a legal instrument conveying the assets of a company to the Trustees.

The Deed also defines the rights of debenture holders and the duties and powers of Debenture Trustees. Company has to execute the Deed with the Deposit trustees. Members as well as debenture holders can inspect the deed

Q.3 Study the following case / situation and express your opinion.

1. Rose limited company proposes to issue debenture to the public to raise funds. After discussions, the Board of directors have decided to issue secured, Redeemable nonconvertible debentures with a tenure of Ten years. Please advise the board on following matters :

a. Should the company appoint Debenture trustee ?

Ans: Yes, The Rose Limited Company should appoint Debenture trustee, as it is mandatory to appoint trustee as and when company decides to issue secured debentures to public to raise funds. thus, the company issuing debenture must appoint one or more debenture trustee.

b. Should the company create a charge on its assets ?

Ans: Yes, All secured debentures are to be secured by creating charges over assets and therefore company should create charges over assets.

c. Can the tenure of debentures be less than ten years ?

Ans: Yes, Tenure of debentures can be less then 10 years. All secured debentures should be redeemed within 10 years from the date of its issue but not advisable as debenture capital is a long term borrowed capital.

2. Violet Ltd. company plans to raise ` 10 crores by issuing debentures. The Board of Directors have some queries. Please advise them on the following __

a. Can the company issue unsecured debentures?

Ans: Yes, The company can issued secured and Unsecured debentures. But they have to get approval of shareholders in a general meeting by passing a special resolution.

b. Can they issue irredeemable debentures?

Ans: NO, The company cannot issue Irredeemable debenture as all the debentures are redeemable i.e. have to be repaid.

c. As the company is offering debentures to its members, can such debentures have normal voting rights ?

Ans: As per the Companies Act 2013 company cannot issued debenture with voting rights. Debenture holders are the creditors of the company. So they don't have normal voting rights. They can vote only matter related to them.

3. DDS financial plans to raise ` 10 crores by issuing secured, Non-convertible debentures. However, as per the Articles of Association, the board of directors have authority only to raise upto 5 crores. They are also considering whether to go for private placement or make public offer. Please advise them on the following __

a. What can be the maximum tenure of the debentures to be issued ?

Ans: The Company can issue debenture for a maximum tenure of 10 years. This is because all secured debenture should be redeemed within 10 years from the date of its issue. only certain companies permitted by ministry of corporate affairs, central Government or RBI can issue debentures beyond a period of 10 years but not exceeding 30 years.

b. Is the proposed issue within the borrowing powers of the board ?

Ans: NO, The proposed issue is not empowered by Articles of Association as it permits only up to Rs. 5 Crore.

c. Within what period should company issue Debenture certificate ?

Ans: The company has to issue Debenture Certificate within 6 months from the allotment of debenture.

Q.4 Answer in brief.

1. State any four provisions of Companies Act 2013 for issue of debentures.

Ans: Provisions for issue of debentures as per Companies Act, 2013.

Following are some of the provisions of the Act which a company has to comply while issuing debentures :

1. No voting rights : A company cannot issue debentures with voting rights. Debenture holders are creditors of the company and so they do not have any voting rights except in matters affecting them.

2. Types of Debentures : A company can issue secured or unsecured debentures and fully or partly convertible debentures or non-convertible debentures. To issue convertible debentures, a Special Resolution has to be passed in the General Meeting. All debentures are redeemable in nature.

3. Payment of interest and redemption : A company shall redeem the debentures and pay interest as per the terms and conditions of their issue.

4. Debenture Certificate : Company has to issue Debenture certificate to the debenture holders within 6 months of allotment of Debentures.

5. Create Debenture Redemption Reserve : Company has to create a Debenture Redemption Reserve Account out of profits of the company available for payment of dividend. This money can be used only for redemption of debentures. As per Companies (Share Capital and Debentures) Amendment Rules 2019, MCA has removed Debenture Redemption Reserve requirement for Listed companies, NBFCs and Housing Finance Companies.

6. Appointment of Debenture Trustees : If the company issues prospectus or invites more than 500 people, (either to Public or its Member) company has to appoint one or more Debenture Trustees. Debenture trustees protect the interest of the debenture holders. Company has to appoint trustees by entering into a contract with them called as Debenture Trust Deed.

7. Debentures Trustees can approach NCLT : Debenture Trustees have to redress the grievances of debenture holders. If the company defaults in repaying the principal amount, on maturity or defaults in paying interest there on, the Debenture Trustees can approach the National Company Law Tribunal for redressal. NCLT can direct a defaulting company to repay the principal amount or interest.

8. Impose restrictions : When the Debenture Trustee is of the opinion that the assets of the company are insufficient or likely to become insufficient to redeem the principal amount of debentures, it may approach the NCLT. NCLT can order a company to restrict incurring further liabilities so as to protect the interest of the debenture holders.

9. Punishment for contravention of provisions of the Companies Act : If the company fails to comply with any provisions of the Act, then the company and its officers shall be liable to pay fine or imprisonment or both as prescribed in the Act

2. What is debenture trust deed ?

Ans:

1) The contact that the company enters into with one or more Debenture Trustees is known as Debenture Trust Deed.

2) The terms and conditions of the agreement is written in the Debenture Trust Deed.

3) it is a legal instrument conveying the assets of a company to the Trustees.

4) The deed also defines the rights of debenture holders and the duties and powers of debenture Trustees.

5) Company has to executes the Deed within 3 months of closure of the issue.

6) Members as well as debenture holders can inspect the deed and also get a copy of it by paying a certain fees.

3. Who are debenture trustees ?

Ans: 1) Debentures Trustees are institutions which protect the interest of the debenture holders.

2) The Trustees become the custodian of the assets on which charge has been created.

3) A company which issues prospectus or invites more than 500 persons to buy its debentures has to appoint one or more Debenture Trustees.

4) Companies issuing secured debentures also must appoint Debentures Trustees.

5) The company creates a charge on its movable or immovable assets or assets of its subsidiary company or holding company. Charge is created in favour of the Debenture Trustees.

6) Debenture Trustees are appointed before prospectus or letter of offer/offer letter is issued or within 60 days after the allotment of debenture.

Q.5 Justify the following statements.

1. A company has to create charge on its assets for issuing secured debentures.

Ans: A company has to create charge on its assets for issuing secured debentures and which can be justified with the following:

1) All secured debenture should be redeemed within 10 years from the date of its issue. Company has to create on the assets of the company or its subsidiary company or holding company.

2) The value of charges should be adequate to cover the enter value of debentures issued and interest to be paid on it. IF a governments company issue secured debentures which has Central or State Government's guarantee, then it need not create any charges on its assets.

3) All secured debentures have to be secured by the assets of the company. In simple word. assets of the company are mortgaged or used as a collateral security to issue secured debentures.

2. Debenture trustees is appointed by a company issuing debentures.

Ans: 1) A company which issues prospectus or invites more than 500 persons to buy its debentures has to appoint one or more Debenture Trustees.

2) Companies issuing secured debentures also must appoint Debentures Trustees.

3) Debentures Trustees are institutions which protect the interest of the debenture holders. the Charge created on assets of the company is created in favour of the Debenture Trustees.

4) Company has to appoint trustees by entering into a contract with them called as Debenture Trust Deed.

5) Hence, Debenture trustees is appointed by a company issuing debentures.

3. A company can issue only certain types of debentures.

Ans: 1) The debentures holders are the creditors of the company. They offered borrowed capital to the company but cannot participate in the management of the company.

2) Therefore, in order to protect the interest of debenture holders, SEBI, through its guild lines allowing companies to issue certain types of debentures in India.

3) Therefore, the companies operating in India can issue secured debentures, convertible debenture, redeemable debentures to the applicant.

4) It protect the interest of creditors in the company.

5) Thus, it is rightly said that a company can issue only certain types of debentures.

Q.6 Answer the following questions.

1. Briefly explain the provisions of Companies Act, 2013 for issue of debentures.

Ans: Following are some of the provisions of the Act which a company has to comply while issuing debentures :

3. Payment of interest and redemption : A company shall redeem the debentures and pay interest as per the terms and conditions of their issue.

4. Debenture Certificate : Company has to issue Debenture certificate to the debenture holders within 6 months of allotment of Debentures.

2. Explain briefly the procedure for issue of debentures.

Ans: PROCEDURE FOR ISSUE OF DEBENTURES

1. Pass Resolution in Board Meeting.

2. Hold Extra-ordinary General Meeting (E.G.M.)

3. Obtain Credit Rating.

4. Filing with Registrar of Companies.

5. Enter into Underwriting Agreement.

6. Issue Prospectus / Offer Letter / Letter of Offer

7. Open Separate Bank Account.

8. Receiving Application Money.

9. Hold Board Meeting.

10. Issue of debenture certificate.

11. Make Entries in the Register of Debenture

Following is the procedure to be followed by a company issuing debentures __

1. Pass resolution in Board Meeting : In the Board Meeting following resolution will have to be passed :

i) amount and type of debentures to be issued and the terms and conditions for issue.

ii) approve prospectus or offer letter or letter of offer.

iii) approve appointment of Debenture Trustees and get their written consent.

iv) authorize Board to create charge on assets of the company.

v) call Extra-ordinary General Meeting if the Board’s borrowing powers need to be increased.

vi) authorizes Board to open a separate bank account for receiving money from applicants.

2. Hold Extra-ordinary General Meeting (EGM) : If the borrowing powers of the Board is to be increased, EGM must be held to get the shareholders’ approval through a Special Resolution.

3. Obtain Credit Rating : Company gets its debentures rated by one or more Credit Rating Agencies. The ratings must be mentioned in the prospectus/offer letter/Letter of offer.

4. Filing with Registrar of Companies : Secretary has to file the Special resolution and copy of Prospectus, offer letter / Letter of offer with Registrar of Companies within 30 days of Board Meeting.

5. Enter into underwriting agreement : Company enters into an underwriting agreement for underwriting its debenture issue.

6. Issue prospectus / letter of offer / offer letter : Company issues prospectus, if it is inviting the public to buy its debentures. Offer Letter is issued if a company makes private placement and Letter of offer for Rights Issue.

7. Open Separate Bank Account : Company opens a separate bank account in a scheduled Bank to receive the money from the applicants.

8. Receiving application money : Subscribers will submit their application along with the required amount to the specified bank within the time period mentioned in the prospectus or letter of offer / Offer Letter.

9. Hold Board Meeting : After the issue closes, a Board Meeting is held to decide and approve allotment of debentures. Board also approves creation of charges on the company’s assets.

10. Issue of Debenture certificate : The allotment procedure has to be completed within 60 days from the receipt of application money. Company has to issue Debenture certificate within 6 months of allotment of debentures.

11. Make entries in Register of Debenture holders : Secretary has to make entries in the Register of Debenture holders within 7 days after the Board approval of allotment.

However, if debentures are issued in demat form, company does not maintain the Register of Debenture holders.

Group A		Group B
a)	Debenture Trustees	1	Power to issue debentures
b)	Debenture holders	2	Protects interest of shareholders
c)	Charge on assets	3	Secured debentures
d)	Board of Directors	4	NCLT
e)	Debenture certificate	5	No voting rights
		6	Unsecured debentures
		7	Protects interest of debenture holders
		8	Voting rights
		9	Proof of ownership of shares
		10	Issued within 6 months of allotment of debentures

Chapter - 4 Issue of Debenture

Chapter - 4 Issue of Debenture

__________________________________________________________________________________

Q.1 A) Select the correct answer from the options given below and rewrite the statements.

C) Write a word or a term or a phrase which can substitute each of the following statements.

D) State whether the following statements are true or false.

E) Find the odd one.

F) Complete the sentences.

G) Select the correct option from the bracket

(Issued within 6 months of allotment, Names of debentureholders, Secured debentures, Trust deed, Debenture holders.)

Ans:

H) Answer in one sentence.

J. Arrange in proper order.

Q.2 Explain the following terms/concepts.

Q.3 Study the following case / situation and express your opinion.

Q.4 Answer in brief.

2. What is debenture trust deed ?

Q.5 Justify the following statements.

Q.6 Answer the following questions.

1. Briefly explain the provisions of Companies Act, 2013 for issue of debentures.

2. Explain briefly the procedure for issue of debentures.

Ans: PROCEDURE FOR ISSUE OF DEBENTURES

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