A debenture is a document that acknowledges a debt owed by the company. When a company issues debentures, it is borrowing money from the debenture holders. Section 71 of the Companies Act, 2013 governs debentures.
Secured vs. unsecured
A secured debenture is backed by a charge on the company's assets. If the company fails to pay, the debenture holders can enforce the charge and recover their money from the assets.
An unsecured debenture is not backed by any charge. The debenture holder is an ordinary creditor and ranks with other unsecured creditors if the company is wound up.
Most large debenture issues are secured, because investors want the protection of a charge.
The charge-creation process
For a secured debenture, the company must create a charge on its assets in favour of the debenture trustee. The charge is created through a debenture trust deed. The company then files Form CHG-1 with the ROC within 30 days of creating the charge.
If the charge is modified later, the company files Form CHG-9. If the charge is satisfied (the debt is repaid), the company files Form CHG-4.
The debenture trustee
A company that issues secured debentures must appoint a debenture trustee. The trustee holds the charge on behalf of the debenture holders and monitors the company's compliance with the debenture terms. The trustee must be registered with SEBI where the issue is to the public.
The Debenture Redemption Reserve (DRR)
A company that issues debentures must create a Debenture Redemption Reserve (DRR) out of its profits. The DRR is a safeguard for the debenture holders. The amount and the timeline depend on the type of company and the type of debenture. The DRR must be maintained until the debentures are redeemed.
The practical points
The company should decide whether the debenture will be secured or unsecured before the issue. A secured issue needs a trust deed, a trustee and a charge filing. An unsecured issue is simpler but less attractive to investors. The company should maintain the DRR and file the charge forms within the prescribed time.
Call to Action: We advise companies on debenture structuring, charge creation and trustee compliance. For a debenture review, contact office@anujdesaiassociates.com, Ph No. 9619456656, Website https://anujdesaiassociates.com, LinkedIn linkedin.com/in/ca-anuj-desai-122547230.