Section 71 of Companies Act, 2013: Debentures, Issue Procedure and Compliance
Section 71 of the Companies Act, 2013 regulates important aspects of debentures, including convertible debentures, secured debentures, debenture trustees, payment of interest, redemption and remedies available to debenture-holders. The detailed conditions for secured debentures and trustees are supplemented principally by Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014, as amended.
What is a debenture?
Section 2(30) of the Companies Act, 2013 defines a debenture broadly to include debenture stock, bonds or any other instrument of a company evidencing a debt, whether or not it constitutes a charge on the assets of the company, subject to the statutory exclusions contained in that definition.
In practical terms, a debenture is a debt instrument through which a company raises borrowed funds on stated terms. Depending on the issue, it may be secured or unsecured, convertible or non-convertible, and listed or unlisted. The governing documents ordinarily specify the amount, interest or coupon, tenure, redemption terms, security, conversion rights where applicable, covenants and events of default.
Section 71 of the Companies Act, 2013 - key provisions
Section 71(1): Convertible debentures
A company may issue debentures carrying an option to convert them into shares, wholly or partly, at the time of redemption. Where such a conversion option is provided, the issue must be approved by a special resolution passed at a general meeting.
Section 71(2): No voting rights
A company cannot issue debentures carrying voting rights. Debenture-holders are creditors in respect of the debt instrument and do not acquire shareholder voting rights merely by holding debentures.
Section 71(3): Secured debentures
Secured debentures may be issued subject to the prescribed terms and conditions. Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014 contains the principal detailed requirements concerning secured debentures, security and debenture trustees.
Section 71(4): Debenture Redemption Reserve
Section 71 contains the statutory basis for a Debenture Redemption Reserve. The actual requirement and exemptions must be read with the current version of Rule 18 and the applicable notifications. The treatment differs according to the class of company and nature of the debenture issue, so the current Rules should be checked before an issue is structured.
Section 71(5) and (6): Debenture trustees
Where the statutory threshold and conditions under Section 71(5) are attracted, one or more debenture trustees must be appointed before the relevant issue or offer. A debenture trustee is required to protect the interests of debenture-holders and address their grievances in accordance with the Act and Rules.
Section 71(7): Liability of trustee
A trust deed or contract cannot validly exempt or indemnify a debenture trustee against liability for breach of trust where the trustee fails to exercise the required degree of care and due diligence. The proviso to sub-section (7) permits only the statutory form of exemption agreed to by the prescribed majority of debenture-holders.
Section 71(8): Interest and redemption
The company must pay interest and redeem its debentures in accordance with the terms and conditions of the issue.
Section 71(9): Protection where assets may be insufficient
If a debenture trustee concludes that the company's assets are insufficient, or are likely to become insufficient, to discharge the principal when due, the trustee may approach the National Company Law Tribunal. After hearing the concerned parties, the Tribunal may restrict the company from incurring further liabilities where necessary to protect debenture-holders.
Section 71(10): Default in redemption or interest
If the company fails to redeem debentures on maturity or fails to pay interest when due, any or all debenture-holders or the debenture trustee may apply to the Tribunal. After hearing the parties, the Tribunal may direct the company to redeem the debentures forthwith on payment of the principal and interest due.
Section 71(11): Omitted
Sub-section (11) was omitted by the Companies (Amendment) Act, 2020 with effect from 21 December 2020. Older reproductions of Section 71 may still show the former penal provision and should not be relied upon as the current text.
Section 71(12) and (13)
A contract with a company to take up and pay for its debentures may be enforced by a decree for specific performance. Section 71(13) empowers the Central Government to prescribe procedures relating to secured issues, the debenture trust deed, inspection and copies of the trust deed, Debenture Redemption Reserve and connected matters.
How to issue debentures - practical compliance framework
The exact procedure depends on whether the issue is a public offer or private placement, secured or unsecured, convertible or non-convertible, and whether the securities are listed or proposed to be listed. A company should therefore map Section 71 with the other applicable provisions before commencing the issue.
| Stage | Key compliance point |
|---|---|
| 1. Check corporate authority | Review the memorandum and articles, borrowing powers, Board authority and any shareholder approval required under the Companies Act. |
| 2. Decide the instrument | Determine whether the debentures are convertible or non-convertible, secured or unsecured, listed or unlisted, and settle tenure, coupon, redemption and other commercial terms. |
| 3. Obtain approvals | Pass the required Board resolution and obtain shareholder approval wherever the Act requires it. Convertible debentures carrying an option to convert into shares require a special resolution under Section 71(1). |
| 4. Select the offer route | Comply with the provisions governing public offer or private placement, as applicable, together with the relevant rules and filing requirements. |
| 5. Appoint trustee where required | Appoint an eligible debenture trustee within the statutory framework and comply with Rule 18 and, for listed debt, applicable SEBI requirements. |
| 6. Create security where applicable | For secured debentures, identify adequate assets or property, create the required charge/security and complete applicable registration and documentation. |
| 7. Issue documents and receive subscription | Prepare the applicable offer document or placement documentation, make required disclosures and receive subscription money through the legally permitted route. |
| 8. Allot and file returns | Complete allotment within the applicable statutory timeline and file the prescribed return of allotment and other required forms with the Registrar. |
| 9. Execute trust deed | Where applicable, execute the debenture trust deed in the prescribed form or substantially in that form within the period specified by Rule 18. |
| 10. Post-issue compliance | Service interest, maintain required security and reserves or deposits where applicable, comply with covenants, make ongoing disclosures and redeem the debentures according to the issue terms. |
Secured debentures and Rule 18
Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014 is central to the issue of secured debentures. It deals with matters including tenure, creation of security, appointment of debenture trustees, duties of trustees, meetings of debenture-holders, the trust deed and redemption-related requirements.
The Rules have been amended several times. Accordingly, a company should not apply an old percentage or exemption relating to the Debenture Redemption Reserve or redemption investment merely because it appears in an older version of Rule 18. The current amended Rules and notifications applicable to the particular class of company should be verified at the time of the transaction.
Debenture trustee and debenture trust deed
The trustee acts for the protection of debenture-holders within the statutory and contractual framework. Rule 18 prescribes eligibility restrictions and duties. These include monitoring the security and the company's compliance with the terms of issue, taking appropriate protective steps, addressing grievances and convening meetings of debenture-holders when the prescribed circumstances arise.
Rule 18 also prescribes a trust deed in Form SH-12, or as near thereto as possible, for cases to which the requirement applies. The current Rule should be checked for the applicable execution timeline and any exceptions.
Interest, redemption and remedies of debenture-holders
The company is bound by the terms of its issue. Failure to pay interest when due or redeem the debentures at maturity can trigger contractual remedies as well as the statutory remedy under Section 71(10). The debenture trustee also has a protective role where the asset position threatens repayment under Section 71(9).
For listed debt securities, the Companies Act framework operates together with the applicable SEBI regime. As of this update, the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 are the principal regulations for issuance and listing of covered non-convertible securities and have been amended from time to time.
Important points to remember
- Debentures cannot carry voting rights.
- A conversion option into shares requires the approval specified in Section 71(1).
- Secured debentures must satisfy the prescribed conditions under Rule 18.
- Trustee appointment, security creation and trust deed requirements should be checked before launching the issue.
- Public offers and private placements follow different statutory routes.
- Listed debt also attracts the applicable SEBI regulations, circulars and continuing obligations.
- Sub-section (11) of Section 71 is no longer part of the operative provision.
Official legal resources
For the authoritative text and current amendments, refer to the official India Code, the Ministry of Corporate Affairs, and, for listed non-convertible securities, the Securities and Exchange Board of India.
Disclaimer: This article is for general legal information. Debenture issues involve transaction-specific requirements under the Companies Act, rules, securities law, listing requirements and the terms of the proposed instrument. Current statutory text, notifications and professional advice should be checked before acting.