What are the guidelines and procedures for issue of debentures ?

The Government, on 17 April 1982, have issued the following, revised guidelines for issue of debentures to the public by public limited listed companies in supersession of the guidelines issued earlier on 27 October 1980:

Guidelines for issue of debentures :

1. Applicability :

The guidelines will apply to issues of secured convertible as well as non-convertible debentures by public listed companies.

2. Objects of issue :

The object of the issue can be either to raise long-term funds for the financing of any expansion or diversification project or to augment the long-term resources of the company for working capital requirements.

3. Quantum of issue :

The amount of issue debentures in the case of working capital requirements shall not exceed 20 per cent of the gross current assets, loans and advances. The amount of issue of deben­tures for project financing will be considered on the basis of the approvals of the scheme of finance by the financial institutions/ government under the provisions of the M.R.T.P. Act, etc.

4. Debt-equity ratio :

The debt-equity ratio including the proposed debenture issue shall not normally exceed 2:1. For this purpose— 'Debt will mean all term loans, debentures and bonds with an initial maturity period of five years or more, including interest accrued thereon. It also includes all deferred payment liabilities but it does not include short-term bank borrowings and advances, unsecured deposits or loans from the public, shareholders and employees, and unsecured loans or deposits from others. It should also include the proposed debenture issue.

'Equity' will mean paid-up share capital including preference capital and free reserves.

Notes :

(1) The computations under guidelines 3 and 4 mentioned above will be based on the latest available audited balance sheet of the company.

(2) A relaxation in the norm of debt-equity ratio of 2 : 1 will be considered favourably for capital intensive projects such as fertilisers, petro-chemicals, cement, paper, shipping, etc.

5. Interest rate :

In the case of convertible debentures the rate of interest shall not exceed 13.5 per cent per annum. In the case of non-convertible debentures the rate of interest shall not exceed 15 per cent per annum.

6. Period of redemption :

The debentures shall not be redeemable before the expiry of a period of seven years.

7. Price at the time of redemption :

A premium upto 5 per cent of the face value can be allowed at the time of redemption in the case of non-convertible debentures only.

8. The face value of the debentures will ordinarily be Rs 100 each.

9. The debentures shall be listed on the stock exchange,

10. Only secured debentures will be permitted for issue to the public.

11. The issue of debentures shall be underwritten. A relaxation is permitted in this regard if the Controller of Capital Issues is otherwise satisfied that the issue need not be underwritten.

12. The shares of the company proposing to issue the debentures must be listed in one or more stock exchanges and the market quota­tion of its equity shares must have been at or above par value during the six months prior to the date of application for issue of debentures.

Procedure for Issue of Debentures :

The procedure for the issue of debentures is as follows:

(1) First of all a Board meeting is convened at which the decision to issue debentures, the number and terms of issue and the rate of interest is taken by means of a resolution to that effect. However, where a company's shares are listed on the stock exchange, the listing agreement stipulates that shareholders' approval should be obtained for the offer of debentures to the public and therefore this approval is also to be obtained.

(2) Then the consent of the Controller of Capital Issues is obtained if the issue exceeds Rs 50 lakhs. If the moneys to be borrowed, together with the moneys already borrowed by the company (apart from temporary loans) exceed the aggregate of the paid up capital of the company and its free reserves, permission of the General Body is also obtained, by ordinary resolution, for the proposed issue [Sec.

(3) In the case of issue of listed debentures to the public by public limited companies, the guidelines prescribed by the Government in that regard (discussed under the preceding heading) must be fully complied

(4) In case the debenture to be issued are bearer ones, it will be necessary to obtain permission from the Reserve Bank of India as well.

(5) In case the debentures are issued under a Trust Deed, necessary consent of trustees is obtained and a draft of Trust Deed is prepared. A draft of prospectus and the Debenture Bond is also prepared.

(6) After the completion of these formalities, the Board approves the drafts of prospectus, Trust Deed and debenture bonds and directs the secretary to arrange for their printing.

(7) The Trust Deed is then executed with the trustees for debenture holders.

(8) The particulars of the charges created on the issue are to be filed with the Registrar of Companies within 30 days of the execution of the Trust Deed for registration and a Certificate of Registration is obtained. This Certificate is to be endorsed on every Debenture Certi­ficate. All particulars are also entered in the "Registrar of Charges" maintained by the company at its registered office.

(9) Where it is proposed to enlist the debentures in any stock exchange approval of the concerned stock exchange is to be obtained.

(10) A copy of the prospectus is then filed with the Registrar and the Prospectus is issued to the public. In case the debentures are to be issued privately (without making a public offer) a statement in lieu of prospectus is to be filed with the Registrar at least three days before the first allotment of debentures.

(11) After the allotment, the particulars about each debentures are entered in the Registrar of Debenture-holders and Deben­ture Certificates are prepared which are issued to the Allottees in due course.