CENTRAL UNIVERSITY OF SOUTH BIHAR

GAYA-823001

SCHOOL OF LAW & GOVERNANCE

**** **** **** **** **** **** **** **** **** **** ****
INVESTMENT LAW,
**** **** **** **** **** **** **** **** **** **** ****

PROJECT REPORT
Debenture, its kind and issues of Debenture.

Submitted By-
PRIYA RANJAN
Submitted to – Mr. Yashvardhan
B.A. LL.B (Hons.) Kumar
th
7 Semester (2015-2020) Assistant Professor,
Enrolment-CUSB1513125031 School of Law & Governance,
Central University of South
Bihar
3
 ACKNOWLEDGEMENT
The project work of “INVESTMENT LAW” on the topic
“Debenture, its kind and issues of Debenture.” This project is
given by our honorable subject professor “Mr. Yashvardhan
Kumar” and first of all I would like to thank him for providing
me such a nice topic and making me aware as well providing me
a lot of ideas regarding the topic and the methods to complete
the project.

I would like to thank all the Library staffs who helped me to

find all the desired books regarding the topic as the whole
project revolves around the doctrinal methodology of research. I
would like to thank to my seniors as well as class mates who
helped me in the completion of this project. I would also like to
thanks to Google and Wikipedia as well as other web sites over
web which helped me in the completion of this project. Last but
not the least, thanks to all who directly or indirectly helped me
in completing of this project.

I have made this project with great care and tried to put
each and every necessary information regarding the topic. So at
the beginning I hope that if once you will come inside this
project you will be surely glad.

-Priya Ranjan

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 INDEX
[Link] CONTENTS PAGE NO.

1 INTRODUCTION 04

2 DEBENTURES: MEANING AND 04

NOMENCLATURE

3 CLASSIFICATION OF DEBENTURES 06

4 ISSUE OF DEBENTURES 08

5 DEBENTURE HOLDERS 09

6 CONCLUSION 13

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 INTRODUCTION

The word ‘debenture’ means to borrow or that which is due and has been
derived from a Latin word ‘debere’.1 Though there is no precise definition
of debenture nevertheless Section 2 (12) of the Companies Act 1956 reads:
“debenture” includes debenture stock bonds and any other securities of a
company, whether constituting a charge on the assets of the company or
not”. This is an inclusive definition and amounts to borrowing of monies
from the holders of debentures on such terms and conditions subject to
which the debentures have been issued. It’s not a technical term and the
definition provided does not describe the nature of debenture. It could be
applied to any mechanism showing that the party making it owes money
and is obliged to pay it and is one of the means to raise the capital of the
company. Any document which either creates a debt or acknowledges it is
a debenture.2 Section 117 to Sections 123 of the Companies Act, 1956
regulate the provisions relating to debentures, appointment of debenture
trustees, their duties, creation of Debenture Redemption Reserve Account,
liability of trustees etc.

Debentures: Meaning and Nomenclature:

A debenture is defined as a certificate of agreement of loans which is given
under the company's stamp and carries an undertaking that the debenture
holder will get a fixed return (fixed on the basis of interest rates) and the
principal amount whenever the debenture matures.

1
Victor E. Cappa, The Corporate Debenture System of South American Countries, The Yale Law Journal, Vol. 43,
No. 4 (Feb., 1934), pp. 571-598
2
See Chitty J. in Levy v. Abercorris Slate Co. (1888), 37 Ch. D. 260 at 264

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In finance, a debenture is a long-term debt instrument used by governments
and large companies to obtain funds. It is defined as "a debt secured only
by the debtor’s earning power, not by a lien on any specific asset." It is
similar to a bond except the security conditions are different. A debenture
is usually unsecured in the sense that there are no liens or pledges on
specific assets. It is, however, secured by all properties not otherwise
pledged. In the case of bankruptcy, debenture holders are considered
general creditors. The advantage of debentures to the issuer is they leave
specific assets burden free, and thereby leave them open for subsequent
financing. Debentures are generally freely transferable by the debenture
holder. Debenture holders have no voting rights and the interest given to
them is a charge against profit.
Definition of Debentures by Indian Companies Act, 1956:
The term debenture includes debenture stocks, bonds and any other
security of a company, whether constituting a charge on the assets of a
company or not.
Features of Debentures as a long-term financial (Debt) instrument:
Following are the basic features of debentures that differentiate them from
other sources of finance. After understanding meaning of different capital
structures, we need to understand peculiar characteristics of debentures that
make them different from commonly used finance sources:
 Investors who invest in the debentures of the company are not the
owners of the company. They are the creditors of the company or in
other words, the company borrows the money from them.
 Funds raised by the company by way of debentures are required to
be repaid during the life time of the company at the time stipulated
by the company. As such, debenture is not a source of permanent
capital. It can be considered as a long-term source.
 In practical circumstances, debentures are generally secured i.e. the
company offers some of the assets as security to the investors in
debentures.
 Return paid by the company is in the form of interest. Rate of
interest is predetermined, but the company can freely decide the

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 same. The interest on debenture is payable even if the company
does not earn the profits
 In financial terms, debentures prove to be a cheap source of funds
from the company’s point of view
So this thing needs to be kept in mind by a company that an investor is
expected to invest in debentures only when liquidity and financial position
of company is very sound. An investor is always careful before investing in
any company, especially in debt instruments where there is hardly any
chance of capital appreciation. So, a company that is very much sure about
it financial well-being could very well come up with issue of debentures.
Debentures are also ideal for companies, which do not want any kind of
dilution in control of management. That means, organizations, which do
not want to issue shares, could come up with issue of debentures.
Apart from that, financial manager must make sure that company is in
sound enough position to make periodic interest payments and also,
repayment of principal amount at the right time.

Classification of debentures
In India, debentures could be classified in basically two categories: on the
basis of security and on the basis of convertibility. Following diagram
shows details of classification of debentures in Indian context:

Classification
Of Debentures

On the basis of On the basis of

convertibility Security

Fully Convertible
Secured
8
Unsecured
Debentures
Partly Convertible
Non-Convertible
Optionally Convertible Debentures
Let us now discuss each of the types of debentures, which are issues in
market by companies to raise funds.
On the basis of convertibility:
 Fully convertible Debentures (FCD): These are fully convertible
into Equity shares at the issuer's notice. The issuer decides the ratio
of conversion. Upon conversion the investors enjoy the same status
as ordinary shareholders of the company.
 Partly Convertible Debentures (PCD): A part of these
instruments are converted into Equity shares in the future at notice
of the issuer. The issuer decides the ratio for conversion. This is
normally decided at the time of subscription.
 Non-Convertible Debentures (NCD): These instruments retain the
debt character and cannot be converted in to equity shares.
 Optionally Convertible Debentures (OCD): The investor has the
option to either convert these debentures into shares at price
decided by the issuer/agreed upon at the time of issue.
On the basis of security:
 Secured Debentures: These instruments are secured by a charge
on the fixed assets of the issuer company. So if the issuer fails on

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 payment of either the principal or interest amount, his assets can be
sold to repay the liability to the investors.
 Unsecured Debentures: These instruments are unsecured in the
sense that if the issuer defaults on payment of the interest or
principal amount, the investor has to be along with other unsecured
creditors of the company.
Along the dimension of security, we have seen that debenntures have been
classified into unsecured(Straight) and secured (mortgage) debentures.
Unsecured debentures do not carry any cahrge on specific assets of the
company while secured debentures carry a fixed or floating charges on
assets of company.
The distinction between secured and unsecured debentures becomes
relevant in case the issuer defaults in payment of interest and principal
amount so taken from investors. Secured debenture holders are entitled to
take possession of security given to them and realize their dues by selling
these assets, which are most commonly- land, buildings, plant, machinery
of business. This right is valuable to debenture holders provided security is
valuable, easily saleable and has not been simultaneously given as security
to other creditors as well. All these factors have to be examined while
evaluating debenture. Unsecured debenture are not backed by any such
security, but an investor needs not worry about that if he has a belief that
company is doing financially and chances of default are very bleak.

ISSUE OF DEBENTURES

Section 117A of the Act puts a company which issues debentures under an
obligation to create security pursuant to by executing trust deed. The need
for executing a trust deed arise when a company wants to issue a
prospectus or letter of offer to the public for securing subscription to its
debentures and for this purpose appoints one or more debenture trustees.

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The documents states that the debenture trustees have consented to be
appointed as such as required by section 117B of the Act. A debenture
trustee hence enjoys an exclusive place of an independent entity
unconnected with the issuer of security but appointed to guard the interest
of holders of debentures. By issuing debentures means issue of a certificate
by the company under its seal which is an acknowledgment of debt taken
by the company.
Section 117A: Debenture trust deed: (1) A trust deed for securing any issue
of debentures shall be in such form and shall be executed within such
period as may be prescribed. (2) A copy of the trust deed shall be open to
inspection to any member. or debenture holder of the company and he shall
also be entitled to obtain copies of such trust deed on payment of such sum
as may be prescribed. (3) If a copy of the trust deed is not made available
for inspection or is not given to any member or debenture holder, the
company and every officer of the company who is in a default, shall be
punishable, for each offence, with fine which may extend to five hundred
rupees for every day during which the offence continues.
The procedure of issue of debentures by a company is similar to that of the
issue of shares. A Prospectus is issued, applications are invited, and letters
of allotment are issued. On rejection of applications, application money is
refunded. In case of partial allotment, excess application money may be
adjusted towards subsequent calls.
Issue of Debenture takes various forms which are as under :
1. Debentures issued for cash
2. Debentures issued for consideration other than cash
3. Debentures issued as collateral security.
Further, debentures may be issued
(i) at par, (ii) at premium, and (iii) at discount

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 DEBENTURE HOLDERS
Debenture holders are not the members but the creditors of the company.
The legal relationship between the company and the debenture holder is
simply that of a contractual relationship of debtor and creditor. If the debt
is secured on some or all of the company’s assets then the relationship is
that of mortgager and mortgagee. Registration of a charge for issue of
debentures is obligatory as per Section 125 (4) of the Companies Act. If a
company issues debentures which are secured by charge then as per the
provisions of Section 128 benefit is available to all debenture holders.

Rights of the debenture holders

Following rights are available to the Debenture Holders:

1. Rights to obtain copies and inspect trust deed Under s 118(1) of the
Companies Act
Each debenture holder of a company has the right to ask for the copy of the
trust deed. Within seven days of the making of the payment a copy of any
trust deed shall be forwarded to the holder of any such debenture for
securing any issue of debentures. To get the copy of trust deed prescribed
fee is needed to be submitted. If the copy is not forwarded within the time
specified the company shall be punishable for the offence with a fine of up
to Rs.500 and then with a further fine up to Rs.200 for every day default is
levied. Debenture holders have a right to inspect the trust deed under
clause (4) of s.118. This right was available only to the debenture holders
under the previous Act but the present Act permits any member of the
company to inspect the trust deed. In Narotamdas T. Toprani v. Dyeing &
3
Mfg Co. Ltd this right is examined by Justice Sujata Manohar of the
Bombay High Court. In this case a company proposed to issue a new series
of debentures. The validity of the proposal was questioned and a stay order
on the proposal was sought in the court. The Court agreed with the

3
(1986) 3 Company Law Journal 179 Bombay

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 company and held that the individuals who had 4 % of the debentures had
no rights to go beyond the declared accounts. It allowed the company to go
ahead with its debenture issue subject to the condition that if the aggrieved
shareholder wanted payment he should be paid out in cash. The Court held
that it can inspect the purpose of petitioner so as to see whether the issue is
of the interest of the debenture holders or otherwise. The right of a
debenture holder of inspecting the company’s record is extremely limited
and under section 118 he can only inspect the debenture trust deed and
obtain a copy of it. The annual reports, copies of certificates, other
documents the register of members and of the debenture holders can be
inspected and copies obtained by the provisions of section 163. The right
of detailed inspection of the record and registers and books of account is
not allowed and no bad conclusion can be drawn if the company does not
permit it.

2. Authority to modify the rights of debenture holders with the consent

of majority
The trust deed sometimes contains a clause that the rights of the debenture
holders may be modified with the consent of a majority of (three fourth, for
instance) of them, and that this consent shall bind all the debenture
holders.4 There is general principal applicable to all authorities conferred
on majorities of classes enabling them to bind minorities that the power
must be exercised for the purpose of benefiting the class as whole and not
merely individual members only. The majority of the debenture holders in
the exercise of this power cannot authorize the company to sell the assets
charged and to divide the proceeds among all the debenture holders, but
among only those willing to accept the lowest price for their debenture.5

3. Right to get notice before confirming the alteration of Memorandum

of Association [sec.17 (3) (a)]:
As mentioned under sec 17(3) (a) of the Act, before confirming the
alteration, the central government must be satisfied that sufficient notice
4
Sneath v. Valley Gold Co. Ltd.,(1893) 1 Ch 47
5
New York Taxi Cab Co., Re, (1913) 1 Ch 1

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 has been given to every holder of the debenture of the company, and to
every other person or class of persons whose interests will be affected by
the alteration of the memorandum.6

4. Right to take possession of charged property: A legal chargee gets the

legal title to the charged property and therefore has an immediate right to
possession of the property. Justice Harman in the case of Four-Maids Ltd
v. Dudley Marshall(properties) Ltd.,7 gave a proper insight in this matter.
The mortgagee may go into possession as soon as possible unless there is
something in the contract expressly or impliedly whereby the mortgagee
has contracted out of those rights. The execution of a decree is only
complete after attachment and sale. Until then the property remains that of
the execution debtor and the title does not pass to execution creditor. Thus
although in the case the goods were, at the time of appointment of the
receivers, under the control of the court broker, the goods remained subject
to the floating charges created by the debentures.8

5. Right to demand for the appointment of the receiver:

Debenture holders may appoint a receiver to take charge of the assets
subjected to the charge. The circumstances under which the debenture
holders can apply for the appointment of a receiver are:
i. where there is a danger of property being lost or diminished in the value
ii. where principal or interest is in arrear or even where there is no such
arrear the assets are in danger.
iii. Where the company is in liquidation or is on the point of being wound
up.
iv. When there are decrees and the judgments against the company.9
v. Where the company is in a state of suspended animation. In Bank of
Credits & Commerce International SA v. BRS Kumar [Link]. 10
Administrative receivers were appointed by the court over the assets of a
6
Orient paper mills Ltd., Re, (1958) 28 Com Cases 523,529
7
(1957) Ch 317 at 320
8
Lochab Brothers v. Kenya Furfural, (1985) LRC (Comm) 737 (Kenya CA). The court of Appeal followed
Mackerzie (Kenya) Ltd v. Pharamico, (1976) KLR 270 (kenya)
9
Lawrence v. West Somerset Rly., (1918
10
(1994) 1 BCLC 211 (Ch D)

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 company. The company had transferred its assets to an associated
company. The exact arrangement under which the transfer of assets had
taken place and what was the financial and commercial relationship
between the two companies was very difficult for the court to reconstruct,
though there was some evidence that the associated company had acquired
its own assets in the course of trading. The debenture holder sought
appointment of a receiver and manager for the associated company also.
The court granted the order. It was arguable that the associated company
was nothing more than the transferor company itself in a new guise. The
charge crystallized because of the transfer and the assets transferred
remained subject to the charge. The mixed individual assets of the
associated company could be ascertained when an account was taken. An
appointment of a receiver by a debenture holder takes effect when the
document of appointment is handed to him by the person having the
necessary authority in the circumstances from which it is fairy to be said
that he was appointing a receiver, and the receiver accepts the proffered
appointment, although the acceptance may be tacit.11

6. Right to apply for winding up of the company if the company fails to

pay its debt .
Debenture holder has a right to apply for the winding up of the company if
he can prove that he claims an undisputed debt and that the company has
failed to discharge it. A contingent or the prospective creditor (such as the
holder of a bill of exchange yet to mature or of debentures not yet payable
or a guarantor of company’s debts) is also entitled to petition for winding
up of the company. But he must give a reasonable security for costs and
establish a prima facie case for winding up [section 439(8)]. Debenture
holder can present a petition for winding up as he is creditor for the amount
of his principal and interest, but not for any premium payable on
redemption, unless the debenture expressly so provides. 12 A debenture
holder’s petition is generally based on the ground that the company is
unable to pay its debts. He will not ordinarily be heard to urge that a
11
Cripps (pharmaceuticals) Ltd v. Wickenden( 1973) 2 All ER 606.
12
Consolidated Goldfields of South Africa v. Simmer and jack East ltd., (1913) 82 LJ Ch 214

15
 winding up order should be made because the substratum of the company
is gone which is usually the proper concern of the company’s
shareholders.13 The mere fact that the debenture holder files a suit for the
realization of the debt, when his petition for winding up the company is
already pending does not debar him from proceeding with his petition for
winding up of the company.14 A winding up proceeding is not merely for
the benefit of the petitioner, but for that of all contributories and all
creditors. Where there is a trustee who is given all the rights of ownership,
a debenture holder as such will not be deemed to be a creditor. But in the
case of any debenture where the holder of the debenture is given the right
to receive or collect the interest amounts directly from the company or the
debenture is a bearer bond, the holder of the debenture will be entitled to a
winding up petition as a creditor. In all the cases the question will be “Is
the holder of the debenture is entitled to collect the amounts or the
principal sum without reference to the trustee”? If he is so entitled, he will
be deemed to be a creditor.15

CONCLUSION

Companies frequently need to borrow large sums of money. The loan

requirement of a company may not be met by a single lender or it may
have to be divided into numerous units. For borrowing money one very
handy means is through debentures. Debenture holders play a vital role by
providing money to the company by means of debentures. In comparison
with the role of debenture holders with the rights available to them we can
13
Bukhtiarpur Bihar Light Rly. Co. v. U.O.I, AIR 1954 Cal. 499
14
Central Bank of India v. Sakhani Minning and Engineering Industries Pvt. Ltd.[1977] ASIL XIII 427
15
See Narotamdas T. Toprani v. Bombay dyeing and [Link]. Ltd. (1990) 68 Com Cases 300 (Bom)

16
observe that their rights are not compatible with their role. Debenture
holders should be given some more rights so as to protect their interest in
the company. There is a need to focus more on the protection of the interest
of the debenture holders in a company. Effective measures must be
initiated for protecting the interest of the debenture holders through legal
basis for a sound corporate governance practices particularly in a country
like India the literacy rate is very low and a large number of literate
population is also not aware of the law and procedure applicable in
Company. The government has recognized that an investor culture and a
protection fund for the benefit of the investors is necessary. There is a need
to revamp the structure and administration of the fund and schemes should
be made more comprehensive and their scope expanded to enable flow of
correct information to the investors as well as their education in respect of
their rights.

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