Companies Act Section 71 — Debentures
CHAPTER IV SHARE CAPITAL AND DEBENTURES
Commercial / Corporate
Summary
Sub-section (1) allows a company to issue debentures that come with an option to convert them into shares, either fully or partly, at the time the debentures are redeemed. However, this type of issue requires approval through a special resolution passed at a general meeting of the company.
Sub-section (2) states that no company can issue any debentures that carry voting rights.
Sub-section (3) permits a company to issue secured debentures, but only under the terms and conditions that may be prescribed by regulations.
Sub-section (4) requires that when a company issues debentures under this section, it must create a debenture redemption reserve account using profits that would otherwise be available for paying dividends. The money credited to this account can only be used for redeeming the debentures, and for no other purpose.
Sub-section (5) prohibits a company from issuing a prospectus or making an offer or invitation to the public, or to its members exceeding five hundred in number, for subscribing to its debentures, unless the company has first appointed one or more debenture trustees. The conditions governing the appointment of these trustees are to be prescribed by regulations.
Sub-section (6) requires a debenture trustee to take steps to protect the interests of the debenture-holders and to address their grievances, in accordance with rules that may be prescribed.
Sub-section (7) declares void any provision in a trust deed securing the issue of debentures, or in any contract with the debenture-holders secured by such a trust deed, that would exempt a trustee from, or indemnify the trustee against, liability for breach of trust, where the trustee fails to show the degree of care and due diligence required, considering the powers, authority, or discretion given to the trustee under the trust deed. However, the liability of the debenture trustee may be subject to exemptions agreed upon by a majority of debenture-holders holding at least three-fourths in value of the total debentures at a meeting held for that purpose.
Sub-section (8) requires a company to pay interest on its debentures and to redeem them in accordance with the terms and conditions of their issue.
Sub-section (9) provides that if a debenture trustee concludes that the company's assets are insufficient, or are likely to become insufficient, to discharge the principal amount when it becomes due, the trustee may file a petition before the Tribunal. After hearing the company and any other interested person, the Tribunal may pass an order imposing restrictions on the company's ability to incur further liabilities, as it considers necessary to protect the interests of the debenture-holders.
Sub-section (10) states that if a company fails to redeem its debentures on the maturity date or fails to pay interest when it is due, the Tribunal may, upon the application of any or all of the debenture-holders or the debenture trustee, and after hearing the parties concerned, direct the company by order to redeem the debentures immediately, with payment of the principal and interest due.
Sub-section (12) provides that a contract with a company to take up and pay for any of its debentures can be enforced through a decree for specific performance.
Sub-section (13) allows the Central Government to prescribe the procedure for securing the issue of debentures, the form of the debenture trust deed, the procedure for debenture-holders to inspect the trust deed and obtain copies of it, the amount of debenture redemption reserve required to be created, and other related matters.
Official Text
(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. 1* * * * *
(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.