Aspects on unsecured debentures

  1. Can a Company issue unsecured debentures?

Yes, As per Sec 71(1) of the Companies Act 2013, company may issue unsecured 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. Is issuing of unsecured debenture a deposit?

As per clause (ix) of Rule 2(1)(c) of the Deposit Rules any amount raised by the issue ofbonds or debentures secured by a first charge or a charge ranking pari passu with the first charge on any assets referred to in Schedule III of the Companies Act, 2013 excluding intangible assets of the Company or bonds or debentures compulsorily convertible into shares of the company within ten years:

Accordingly company is allowed to issue unsecured Compulsory Convertible Debentures (CCD) provided it is compulsorily convertible into shares within ten years.

INCOME TAX GLIMPSE ON DEBENTURES:

Interest Payment: Any interest paid on Compulsory Convertible Debentures (CCD) issued to associated enterprise will be subject to transfer regulation of India and should not be more than acceptable benchmark of interest rate.

Pricing guidelines: Any issuance of shares by private limited company shall not be at price less than the fair market value calculated as per Rule 11UA of the Income Tax rules.

Debentures to be considered as Deposits:

All secured debentures are exempt from deposits. In case of unsecured debentures cane be understood by the given chart:

Procedure to issue unsecured debentures:

S.No.ParticularsContent
1Calling Board MeetingIssue notice for conducting Board Meeting
2Hold Board MeetingConduct BM with following actions Draft offer letter for private placements in Form PAS-4Draft records for private placement in Form PAS-5Prepare Valuation ReportOpening of separate bank account Authorize Company Secretary or director to issue notice of Extra Ordinary General  Meeting (EGM)  
3Hold EGMHold EGM and fill Form MGT-14
4Fill form to ROCCirculation of offer letter Fill Form GNL-2 with attached PAS-4 and PAS-5. Form PAS-3 to be filed related to return of allocations

Certificate of Debenture:

Certificate of Debenture should be issued within 6 months from the date of allocation.