Tuesday, September 1, 2020

Debentures

It is possible that a company’s financial need may not be met by the fund raised from investors only; the money collected through sale of shares may still be insufficient to run the business of the company. In this case, the company may opt for borrowing money from the public by issuing debt securities (debentures). Accordingly, Money may be borrowed from individuals, banks and other lending financial sources who will be creditors of the company holding the debentures as securities.

Not all forms of business organizations have the power to issue debentures.   Only a share company has the power to issue debentures to meet its financial need. Other forms of business organizations, for example a private limited company (Art.510(3)) and partnerships have no power to issue debentures nor do have individuals any such power. 

A share company can issue debentures only when the shareholders have cleared their obligations on the shares.  According to Art. 429(2)&(3), no negotiable (transferable) debentures shall be issued by companies whose capital is not fully paid and which have not issued a balance sheet in respect of their first financial year. The reason behind such requirements seems to safeguard the interest of the creditors--debenture holders. A company should not be allowed to issue debentures so as to saddle all the chance of risks on the creditors when its capital has not fully been paid up.

                       i) Forms of debentures

As that of shares, debentures may be registered or bearer. The difference lies only in the mode of their transfer. Thus, registered debentures can be transferred from one person to the other where the necessary registration is completed and when the debenture bond is conveyed to the transferee. Transfer of bearer debenture is completed where the bond is delivered to the transferee. The holder of the bearer debentures is assumed to be the owner thereof and is entitled to exercise rights deriving from the debentures. These rights may include the right to collect interest, participate in debenture holders meeting, the right to have his debenture redeemed, etc.

 

ii)            Classes of debentures

Like that of shares, a company may design different classes of debentures with varying privileges. Thus, debentures may be redeemable or irredeemable. The difference between those classes of debentures is that redeemable debentures are debentures that may be redeemed by the company pursuant to the terms stipulated in the debenture certificate (bond) while the holders of irredeemable debentures will retain them for the life time of the company unless the debentures are transferred to third parties.

It is also possible that debentures may be convertible or non-convertible in which the former may be converted into shares. Non-convertible debentures may however be changed into convertible subject to the agreement of the shareholders in their general meeting to that effect and the resolution of debenture holders in their special meeting.

In general, holders of debentures of a given issue may combine as a legal personality to protect their common interest participating in general meetings of their own (Art. 435(1)).

 

As per Art. 436(7) of the comm. Code, the calling and holding of general meeting of debentures holders shall be at the expense of the debtor company. Similarly, the remuneration of the agent of debentures holder shall be borne by the debtor company (Art. 442(2).

 

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