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Debenture Issuance: Steps and Regulatory Compliance

Debenture Issuance: Steps and Regulatory Compliance

Debentures are a popular financial instrument used by companies to raise funds from the market. They offer an alternative source of financing, allowing businesses to raise capital without diluting ownership or relinquishing control. Issuing debentures requires careful planning, adherence to regulatory guidelines, and effective communication with potential investors. This article provides an in-depth step-by-step approach to successfully issuing debentures.

Mandatory Requirements

Before delving into the procedure, it’s essential to understand the mandatory requirements for the issue of debentures:

  1. No Voting Rights: Debentures cannot be issued with voting rights.
  2. Debenture Trustee: Debentures cannot be issued to more than 500 people without appointing a debenture trustee, whose duty is to protect the interests of debenture holders and address their grievances.
  3. Debenture Redemption Reserve (DRR): Upon issuing debentures, a company must create a DRR.
  4. Default Measures: In case of a default in repayment at maturity or in interest payment, the debenture trustee will approach the tribunal to take appropriate measures.

Step-by-Step Guide for Issuing Debentures

Step 1: Determine the Need for Debentures

Evaluate your company’s financial requirements to ensure that issuing debentures aligns with your capital-raising strategy. Consider the amount of capital needed, the timeline for repayment, and the cost of servicing the debt.

Step 2: Decide on the Type of Debentures

Choose the type of debentures that best suit your company’s needs:

  • Convertible Debentures: Can be converted into equity shares.
  • Non-Convertible Debentures (NCDs): Cannot be converted into equity shares.
  • Secured Debentures: Backed by the company’s assets.
  • Unsecured Debentures: Not backed by any collateral.

Step 3: Appoint Professionals

Seek expert advice and consider appointing professionals such as lawyers, investment bankers, and financial advisors. They will guide you through the legal and regulatory aspects of issuing debentures, ensuring compliance with applicable laws and regulations.

Step 4: Draft a Prospectus

Prepare a comprehensive prospectus that provides potential investors with all necessary information about your company and the debenture offering. This document should comply with regulatory guidelines and include details about your company’s background, financials, business prospects, risk factors, and terms of the debentures.

Step 5: Notify the Stock Exchange

For listed companies, give prior intimation to the stock exchange about the Board of Directors’ meeting where the proposal for the issue of debentures through private placement will be considered. This should be done at least 2 working days in advance, excluding the date of intimation and the date of the meeting, as per Regulation 29 of the SEBI (LODR) Regulations, 2015.

Step 6: Convene a Board Meeting

  • Issue Notice: Issue a notice of the Board Meeting to all directors at their registered addresses at least 7 days before the meeting. In urgent cases, a shorter notice can be issued.
  • Agenda and Resolutions: Attach the agenda, notes to the agenda, and draft resolutions with the notice.
  • Board Resolution: Hold the Board Meeting to pass resolutions to:
    • Approve the issue of debentures through private placement.
    • Approve the Private Placement Offer Letter.
    • Identify the group of persons to whom the private placement shall be made.
    • Fix the date, time, and venue for the General Meeting.
    • Approve the draft notice of the General Meeting along with the explanatory statement as per Section 102 of the Companies Act, 2013.
    • Authorize a Director or Company Secretary to sign and issue the notice of the General Meeting and perform necessary actions.

Listed companies must disclose the outcome of the Board Meeting to the stock exchange within the following timeframes:

  • Thirty minutes from the closure of the meeting for internal decisions.
  • Twelve hours for internal events.
  • Twenty-four hours for external events.

Step 7: File Form MGT-14

File the copy of the Board Resolution with the ROC in Form MGT-14 within 30 days of passing the resolution in the Board Meeting.

Step 8: Obtain Shareholders’ Approval

  • General Meeting: Convene a General Meeting or pass a resolution by postal ballot.
  • Notice: Send a notice of the General Meeting at least 21 days before the meeting. For a shorter notice, obtain consent from the majority in number and 95% of the paid-up share capital.
  • Conduct Meeting: Hold the General Meeting to pass a Special Resolution for the issue of debentures through private placement.

Listed companies must disclose the proceedings of the General Meeting to the stock exchange within 24 hours and post the details on the company’s website within 2 working days. Additionally, submit voting results to the stock exchange within 2 working days from the conclusion of the meeting.

Step 9: Open Separate Bank Account

Open a separate bank account in a scheduled bank to receive the application monies.

Step 10: Preparation and Filing of Private Placement Offer Letter

  • Record the names of the persons to whom the debentures will be offered.
  • Prepare and send the Private Placement Offer Letter in Form PAS-4 within 30 days of recording the names.
  • Maintain a complete record in Form PAS-5.

Step 11: Receive Subscription Amount

Receive the subscription amount through cheque, demand draft, or other banking channels from the subscriber’s bank account, except for debentures issued for non-cash consideration.

Step 12: Allotment of Securities

  • Convene a Board Meeting or pass a resolution by circulation within 60 days of receiving the application money.
  • Issue notices, attach the agenda, notes, and draft resolutions.
  • Hold the Board Meeting to approve the allotment of debentures and authorize the filing of the return of allotment with the ROC.
  • Circulate the draft minutes of the meeting within 15 days.

Step 13: Make Necessary Entries in Registers

Record the entries in the Register of Debenture Holders in Form MGT-2 within 7 days of the Board Meeting approving the allotment.

Step 14: File Return of Allotment with ROC

File the return of allotment in Form PAS-3 within 15 days of the allotment with the following attachments:

  • List of allottees.
  • Board or shareholders’ resolution approving the allotment.
  • Complete record of private placement offers and acceptances in Form PAS-5.

Step 15: Issue Relevant Certificates

For private companies not issuing debentures in demat format, issue and deliver the debenture certificates within 6 months from the date of allotment

Frequently Asked Questions

  1. Who issues a debenture certificate?

A company issues a debenture certificate, which serves as a formal promise to repay the borrowed amount to debenture holders.

  • Who cannot issue debentures?

Debentures cannot be issued with voting rights. Additionally, a company cannot issue debentures to more than 500 individuals without appointing a debenture trustee. The trustee’s role is to safeguard the interests of debenture holders and address any concerns they may have.

  • What is the maximum period of debentures?

Secured debentures typically cannot have a maturity period exceeding 10 years from the date of issue. However, companies involved in infrastructure projects may issue debentures for periods exceeding 10 years, up to a maximum of 30 years.

  • Can debentures be issued without interest?

Yes, zero coupon rate debentures are issued without specifying a regular interest rate. Instead, they are issued at a significant discount to their face value. The difference between the issue price and the nominal value is considered as the implied interest for the duration of the debentures.

Conclusion

Issuing debentures can be an effective way for companies to raise capital and meet their financial objectives. By following this step-by-step guide, you can ensure the debenture issuance process successfully. Remember to seek professional advice, comply with regulatory requirements, and maintain transparency throughout the process. A well-executed debenture issuance can attract investors, diversify your funding sources, and contribute to the growth and stability of your business. By leveraging InstaFiling’s services, companies can navigate the complexities of debenture issuance efficiently, attracting investors and ensuring a successful capital-raising process that aligns with their financial goals.

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