Share Capital & Debentures - Part 2
Section 60. Publication of authorised, subscribed and paid-up capital
60 (1).
Whenever a company issues any notice, advertisement, official publication, or uses its business letterhead, billhead, or letter paper, and it mentions its authorised capital (the maximum amount of share capital a company is permitted to issue as per its memorandum), then:
It must also clearly mention two additional details:
The subscribed capital (the part of authorised capital for which investors have agreed to take shares),.
The paid-up capital (the portion of subscribed capital for which money has actually been received by the company).
These details must be displayed equally prominently and in similarly clear and visible text, so that no misleading impression is given about the company’s financial strength or size.
60(2)
If a company fails to comply with this requirement, it attracts penalties.
The company itself must pay a penalty of ₹10,000, and
Every officer in default must pay a penalty of ₹5,000 for each instance of default.
Section 61. Power of a limited company to alter its share capital
61(1).
A limited company that has a share capital, and whose articles of association specifically permit it, can alter its memorandum of association through a resolution passed in a general meeting.
This alteration can take several forms:
(a) The company may increase its authorised share capital by any amount it considers necessary or expedient.
This allows companies to issue more shares in the future when they need additional funds or want to expand operations.
(b) The company may consolidate and divide its existing share capital into shares of larger denominations.
For example, ten shares of ₹10 each could be consolidated into one share of ₹100.
However, such consolidation must not change the voting percentage of any shareholder.
If it does, the change requires prior approval of the Tribunal to ensure fairness among shareholders.
(c) The company may convert its fully paid-up shares into stock, and later, reconvert that stock into fully paid-up shares of any denomination.
(d) The company may subdivide its shares into smaller denominations, thereby increasing the number of shares.
However, after subdivision, the proportion between the paid-up and unpaid amount on each smaller share must remain the same as it was before.
For instance, if a ₹100 share was ₹50 paid-up, and it is subdivided into two ₹50 shares, each new share must have ₹25 paid-up.
(e) The company may cancel shares that have not yet been taken up or agreed to be taken up by any person and thereby reduce its share capital by the amount of those cancelled shares.
61(2)
Such cancellation of unissued shares is not considered a reduction of share capital under the Act.
Therefore, it doesn’t require the special procedures and approvals that apply when a company reduces already issued or paid-up share capital.
Section 62. Further issue of share capital
62(1).
When a company that already has a share capital wishes to increase its subscribed capital (that is, the portion of capital for which shares have been taken by shareholders) by issuing additional shares, the new shares must be offered in one of the following three ways:
(a) To existing equity shareholders (Rights Issue)
The company must first offer these new shares to the current holders of equity shares in proportion to their existing shareholding as closely as possible by sending a letter of offer.
This is known as a rights issue, and it must comply with the following conditions:
(i). The offer must be made by notice, which clearly states:
The number of shares being offered, and
A time limit within which the offer must be accepted.
This time limit cannot be less than 15 days and cannot exceed 30 days from the date of the offer.
If the shareholder does not accept the offer within that period, it will be treated as declined. (However, rules may allow a shorter period if prescribed.)
(ii). Unless the company’s articles of association say otherwise, the offer shall include a right of renunciation , the shareholder has the right to transfer
(renounce) all or part of the offered shares to another person.
The notice sent to the shareholder must clearly state this right.
(iii). After the expiry of the offer period or if the shareholder declines the offer earlier the company’s Board of Directors may dispose of the unaccepted shares in
any manner that is not disadvantageous to the existing shareholders or to the company itself.
b) To employees under an Employee Stock Option Scheme (ESOP)
The company may issue new shares to its employees under an approved Employees’ Stock Option Scheme (ESOP). This can be done only if:
A special resolution is passed by the company in a general meeting, and
The issue complies with the rules and conditions prescribed for such schemes.
(c) To any other persons (Preferential Allotment)
The company may also issue shares to any other persons, whether or not they are existing shareholders or employees. This can be done only if:
It is authorised by a special resolution.
The price of such shares is determined based on a valuation report prepared by a registered valuer.
The issue may be made for cash or for consideration other than cash (for example, in exchange for property or services), provided it complies with Chapter III of the Act and any other prescribed conditions.
This is commonly referred to as a preferential issue.
62(2).
The notice mentioned above, that is, the offer letter sent to shareholders must be dispatched by registered post, speed post, courier, electronic mode, or any other mode having proof of delivery.
It must reach all existing shareholders at least three days before the opening of the issue, ensuring they have fair opportunity to consider and respond.
62(3).
This section does not apply to an increase in subscribed capital that happens automatically when the holders of convertible debentures or loans exercise their option to convert those into shares.
Such conversions are valid if the terms of issue of the debentures or loans which include a right of conversion were approved by a special resolution passed by the company before the issue or raising of the loan.
62(4).
If a company has issued debentures or taken a loan from the Government, and the Government believes it is necessary in the public interest, it may, by order, direct the conversion of those debentures or loans (in whole or part) into shares of the company.
This power can be exercised even if the original terms did not provide for such a conversion.
However, if the company does not agree with the terms or conditions of such a conversion, it can appeal to the Tribunal within 60 days of receiving the Government’s order.
The Tribunal, after hearing both sides, will pass whatever order it considers appropriate.
62(5).
When deciding the terms and conditions of conversion, the Government must take into account several factors, including:
the financial position of the company,
the terms of issue of the debentures or loans,
the rate of interest on them, and
any other relevant matters.
62(6).
If the Government has ordered a conversion and no appeal has been filed, or the appeal has been dismissed, then the company’s memorandum of association shall be automatically altered to reflect the change.
Specifically, the authorised share capital of the company will be deemed to be increased by the value of the shares created through the conversion of the debentures or loans.
Section 63. Issue of bonus shares
63(1).
A bonus share means additional shares given to existing shareholders free of cost, by converting the company’s accumulated profits or reserves into share capital.
A company may issue fully paid-up bonus shares to its members in any manner whatsoever, but only out of the following sources:
(i) Free reserves - These are the profits earned by the company over time that are available for distribution as dividends or can be used for other purposes.
(ii) Securities premium account -This is the amount collected by the company when it issues shares at a price higher than their face value.
(iii) Capital redemption reserve account - This reserve is created when a company buys back or redeems its own preference shares.
The balance here can also be used for issuing bonus shares.
However, there is one strict limitation:
No bonus shares can be issued by capitalising any revaluation reserve.
reserves created because the value of assets (like land or property) was increased on paper.
Only genuine, realised profits or reserves can be used.
63(2).
A company cannot issue bonus shares (by using its reserves or profits) unless all the following conditions are satisfied:
(a) It must be authorised by its articles of association.
If the company’s constitution (articles) does not permit bonus issues, it must first be amended to allow it.
(b) The issue must be recommended by the Board of Directors and approved by the shareholders in a general meeting.
This ensures that both management and owners’ consent to the issue.
(c) The company must not have defaulted in paying any interest or principal on its fixed deposits or debt securities (such as debentures).
Defaults make the company ineligible to reward shareholders with bonus shares.
(d) The company must not have defaulted in paying any statutory dues of employees, such as:
Provident fund contributions,
Gratuity, or
Bonus payments.
(e) If there are any partly paid-up shares (shares not yet fully paid for by shareholders), they must be made fully paid-up before issuing the bonus shares.
(f) The company must comply with all other prescribed conditions, if any, under the rules made by the government or regulatory authorities.
63(3).
Bonus shares cannot be issued in place of a dividend.
Therefore, the company cannot declare bonus shares as a substitute for a cash dividend.
Bonus shares are given in addition to, not instead of, dividends their purpose is to convert reserves into share capital, not to distribute profits directly as
income.
Section 64. Notice to be given to Registrar for alteration of share capital
64(1)
A company is legally required to inform the Registrar of Companies (ROC) whenever it makes any change to its share capital.
This notice must be filed in the prescribed form within 30 days of the change, and it must be accompanied by an altered copy of the memorandum of association.
The requirement to give notice applies in the following cases:
(a) When a company alters its share capital in any of the ways mentioned under Section 61(1).
For example:
Increasing its authorised share capital.
Consolidating or dividing shares.
Converting shares into stock.
Subdividing shares into smaller values.
Cancelling unissued shares.
(b) When an order by the Government increases the authorised share capital of a company such an increase usually happens when the Government
converts certain debentures or loans into shares for public interest reasons.
(c) When a company redeems any redeemable preference shares that is, when it pays back the holders of preference shares and cancels those shares.
In all these cases, the company must formally notify the ROC of the change, ensuring the official records are accurate and up to date.
64(2).
If a company fails to file this notice within the required 30-day period, penalties will apply.
The penalties are as follows:
The company itself will have to pay a penalty of ₹500 per day for each day the default continues.
Every officer of the company who is responsible for the default (such as directors or company secretary) will also be liable to pay ₹500 per day for the period of default.
However, the law also sets a maximum limit on these penalties:
Up to ₹5,00,000 (five lakh rupees) for the company, and
Up to ₹1,00,000 (one lakh rupees) for each officer in default.
Section 65. Unlimited company to provide for reserve share capital on conversion into a limited company
An unlimited company is a company where the members (shareholders) have unlimited liability.
If the company’s assets are not enough to pay its debts, members can be required to contribute without limit from their personal property.
When such a company decides to register as a limited company, it can, through a formal resolution, make certain changes to its share capital to protect future creditors and fix the extent of member liability.
(a)
The company may increase the nominal (face) value of its share capital by increasing the nominal amount of each share.
However, this increase comes with an important restriction:
The extra capital created by this increase cannot be called up (collected from shareholders) unless the company is being wound up (i.e., closed down and its assets are being sold to pay off debts).
This portion of capital is treated as reserve capital, meant to be called upon only in the event of liquidation, to ensure there are funds available to pay creditors.
(b)
Alternatively, or in addition, the company may decide that a specific portion of its uncalled share capital (that is, capital that has not yet been demanded from shareholders) shall not be capable of being called up, except when the company is being wound up.
The company can reserve a part of its share capital so that it remains untouched during normal operations and becomes callable only during winding up.
This also becomes part of the reserve capital, serving as a safety net for creditors.
66. Reduction of share capital
66(1).
A company that is limited by shares or limited by guarantee having a share capital may reduce its share capital by passing a special resolution, but this reduction becomes valid only after confirmation by the Tribunal (NCLT) on the company’s application.
The company can reduce its share capital in any manner, including the following:
(a) It may extinguish or reduce the liability on shares that are not fully paid-up.
(b) With or without reducing the liability, it may:(i) Cancel paid-up share capital that is lost or unrepresented by assets (for instance, when the company has incurred losses and the paid-up capital no longer reflects real assets).
(ii) Pay off any excess capital that is not needed by the company. After doing so, the company must alter its memorandum to reflect the new share capital structure.
However, there is an important restriction:
No company can reduce its capital if it is in arrears in repayment of any deposits or interest thereon, whether taken before or after the commencement of
the Act.
66(2).
When an application for reduction is made to the Tribunal, the Tribunal must send notice of the application to:
The Central Government,
The Registrar of Companies (ROC),
The Securities and Exchange Board of India (SEBI) (for listed companies), and
The creditors of the company.
These parties have three months to make any representations or objections. If no reply is received within that period, it is assumed that they have no objection.
66(3).
The Tribunal may confirm the reduction if it is satisfied that:
All debts and claims of creditors have been paid, secured, settled, or
Their consent has been obtained.
Additionally, the Tribunal will not approve the reduction unless the accounting treatment proposed by the company complies with Section 133 (Accounting Standards), and the company files a certificate from its auditor confirming such compliance.
66(4).
Once the Tribunal confirms the reduction, the company must publish the order in the manner directed by the Tribunal usually in newspapers or public notices to inform shareholders and creditors.
66(5).
After the order is confirmed, the company must deliver a certified copy of the Tribunal’s order and an approved minute to the Registrar within 30 days.
The minute must state
(a). The amount of share capital after reduction.
(b) The number of shares.
(c) The nominal amount of each share.
(d) The amount (if any) deemed paid-up on each share.
Once the Registrar registers these documents, he issues a certificate confirming the reduction.
66(6).
This section does not apply to buy-back of shares under Section 68.
Buy-back is a separate legal process where a company repurchases its own shares from shareholders.
66(7).
After reduction, no member (present or past) shall be liable to contribute more than the difference (if any) between the amount paid on the shares and the reduced amount fixed by the Tribunal’s order.
66(8).
If a creditor’s name was omitted from the list (due to ignorance of the proceedings or their effect), and later the company defaults on its debt under Section 6 of the Insolvency and Bankruptcy Code, 2016, then:
(a) Every person who was a member at the time of registration of the reduction order will be liable to contribute to the payment of that debt, up to the amount they would have contributed if the company had been wound up the day before the order.
(b) If the company is wound up, the Tribunal may, on the creditor’s application, prepare a list of such members and enforce calls on them to pay their due contributions, as though they were ordinary contributories in winding up.
66(9).
This provision clarifies that sub-section (8) does not affect the rights and obligations among contributories (i.e., shareholders) themselves.
Their internal relationships remain the same.
66(10).
If any officer of the company:
(a) Knowingly conceals the name of a creditor entitled to object.
(b) Misrepresents the amount or nature of any creditor’s claim.
(c) Abets or participates in such concealment or misrepresentation.
Such an officer is liable under Section 447 (which deals with punishment for fraud, involving imprisonment and heavy fines).
Section 67. Restrictions on purchase by the company or giving of loans by it for the purchase of its shares
67(1).
A company limited by shares or by guarantee and having share capital cannot buy its own shares, unless it does so through a proper and lawful reduction of share capital as permitted under the Act.
It must follow the procedure given for reduction of capital under the law, which involves approval, safeguards for creditors, and filing requirements.
This restriction ensures that companies do not use their funds to artificially inflate the value of their own shares or manipulate control, which could harm shareholders and creditors.
67(2).
A public company cannot provide financial assistance, directly or indirectly, for anyone to buy or subscribe to its shares or the shares of its holding company.
This includes giving:
Loans
Guarantees
Securities or collateral
Any other financial help
67(3).
However, there are certain exceptions to the above rule. These are legitimate situations where providing money for buying shares is allowed.
The exceptions are:
(a) If the company is a banking company, it can lend money in the normal course of its business even if the borrower uses it to buy shares.
(b) If the company has a special scheme (approved by a special resolution of shareholders and subject to prescribed rules) that allows employees or
trustees to buy fully paid-up shares of the company or its holding company.
(c) If the company gives small loans to its employees (not to directors or key managerial personnel), up to six months of their salary, to help them buy fully
paid-up shares in the company or its holding company. Such shares must be owned beneficially by the employees themselves.
The law also requires that if employees hold such shares and don’t exercise voting rights directly, the company must disclose this fact in the Board’s Report.
67(4).
Restrictions do not stop a company from redeeming its preference shares.
If a company had earlier issued redeemable preference shares, it can buy them back or redeem them in accordance with the provisions of the Act or the earlier company law.
67(5).
If any company breaks these rules,
The company itself can be fined not less than ₹1 lakh and up to ₹25 lakh.
Every officer in default (such as directors or key officials) can face imprisonment up to 3 years, and a fine between ₹1 lakh and ₹25 lakh.
68. Power of the company to purchase its own securities
Buy Back of Shares
A “buy-back” means when a company purchases its own shares from the shareholders.
This is usually done to reduce share capital, improve the company’s financial ratios, increase earnings per share, or consolidate ownership.
However, since such actions affect the company’s capital and creditors’ interests, the law lays down strict conditions, limits, and procedures to ensure transparency and financial stability.
68(1).
A company can buy back its own shares or specified securities from the following sources only:
(a) From its free reserves (accumulated profits available for distribution as dividends),
(b) From its securities premium account, or
(c) From the proceeds of a fresh issue of any shares or other specified securities.
However, a company cannot use the proceeds of an earlier issue of the same kind of shares or securities to buy back those same kinds again.
For example, if a company has issued equity shares earlier, it cannot use the money raised from issuing new equity shares to buy back old equity shares.
68(2).
A company can buy back its shares only if it satisfies all the following conditions:
(a) The company’s Articles of Association (AOA) must authorise the buy-back. If not, the AOA must first be amended.
(b) A special resolution must be passed at a general meeting authorising the buy-back.
However, if the buy-back is 10% or less of the total paid-up equity capital and free reserves, the company’s Board of Directors can approve it by passing a Board resolution.
No need for shareholder approval in such a small buy-back.
(c) The buy-back must not exceed 25% of the aggregate of paid-up capital and free reserves.
For equity shares, this 25% limit is calculated with reference to total paid-up equity capital of that financial year.
(d) After the buy-back, the company’s debt-equity ratio (total debts compared to paid-up capital and free reserves) must not be more than 2:1.
This ensures that the company does not become over-leveraged or financially unstable.
However, the Central Government can prescribe a higher ratio for certain classes of companies.
(e) The shares or securities proposed to be bought back must be fully paid-up.
Partly paid-up shares cannot be bought back.
(f) If the shares or securities are listed on a recognised stock exchange, the buy-back must be carried out in accordance with SEBI regulations.
(g) If the shares are unlisted, the buy-back must follow the rules prescribed by the Central Government.
Also, the law provides that no buy-back offer can be made within one year from the closure of any previous buy-back. This prevents companies from continuously reducing their capital.
68(3).
When the company proposes to pass a special resolution for buy-back, the notice of the meeting must include an explanatory statement containing all relevant information so that shareholders can make an informed decision.
This statement must include:
(a) Full disclosure of all material facts.
(b) The reason or necessity for the buy-back.
(c) The class of shares or securities to be bought back.
(d) The amount of money to be invested in the buy-back.
(e) The time limit within which the buy-back will be completed.
68(4).
Once approved, every buy-back must be completed within one year from the date of the passing of:
The special resolution (in case of shareholder approval).
The Board resolution (in case of buy-backs within 10%).
68(5).
A company can buy back its shares or securities in any of the following ways:
(a) From existing shareholders or security holders on a proportionate basis (for example, offering to buy back 10% from all shareholders equally).
(b) From the open market (for example, through stock exchange purchases).
(c) By purchasing shares issued to employees under employee stock option plans (ESOP) or sweat equity schemes.
68(6).
Before making the buy-back, the company must file a Declaration of Solvency with:
The Registrar of Companies (ROC), and
The Securities and Exchange Board of India (SEBI) (if the company’s shares are listed).
This declaration must:
Be signed by at least two directors, one of whom must be the Managing Director,
Be verified by an affidavit, and
Confirm that the company has made full inquiry into its affairs and believes that it will remain solvent (able to pay its debts) for at least one year after the buy-back.
Unlisted companies only need to file the declaration with the Registrar, not SEBI.
68(7).
After completion of the buy-back, the company must extinguish and physically destroy the shares or securities it bought within seven days from the last date of the buy-back.
68(8).
Once a company completes a buy-back, it cannot issue the same kind of shares or securities for a period of six months, except in limited cases such as:
Issue of bonus shares.
Conversions arising from existing obligations (like converting debentures, warrants, ESOPs, sweat equity, or preference shares).
68(9).
The company must maintain a register recording complete details of the buy-back, such as:
Number of shares or securities bought,
Consideration paid,
Date of cancellation,
Date of extinguishment and destruction, and
Other prescribed particulars.
68(10). Return of Buy-Back
After completing the buy-back, the company must file a return with:
The Registrar of Companies.
SEBI (in case of listed companies) within 30 days of completion.
The return must contain all prescribed particulars of the buy-back process.
Unlisted companies need to file the return only with the Registrar.
68(11).
If the company fails to comply with any provision of this section or SEBI regulations (in case of listed securities), it will face penalties.
The company can be fined between ₹1,00,000 and ₹3,00,000, and
Every officer in default will also be fined between ₹1,00,000 and ₹3,00,000.
Explanation:
“Specified securities” include employees’ stock options and any other securities as may be notified by the Central Government.
Explanation
“Free reserves” also include the securities premium account, meaning the balance in the premium account can be used for buy-back purposes.
69. Transfer of certain sums to capital redemption reserve account
69(1).
When a company buys back its own shares using its free reserves or securities premium account, the law mandates that the company must transfer an amount equal to the nominal (face) value of the shares bought back to a Capital Redemption Reserve Account (CRR).
If a company buys back 10,000 equity shares of ₹10 each, the nominal value of the shares is ₹1,00,000.
Hence, the company must transfer ₹1,00,000 from its free reserves or securities premium account to the CRR account.This transfer ensures that even though the company has reduced its paid-up share capital by the buy-back, an equivalent amount is kept aside as a permanent capital reserve.
It cannot be used for paying dividends or any other routine purpose it serves as a protection for creditors and maintains the company’s financial integrity.
The company must also disclose the details of such transfer in its balance sheet, making the transaction transparent and compliant with financial reporting norms.
69(2).
The Capital Redemption Reserve (CRR) is not a general-purpose fund.
It can be used only for one specific purpose to issue fully paid-up bonus shares to the existing shareholders.
In other words, the company can later use the CRR amount to convert it into capital again by issuing bonus shares instead of distributing it as profit or dividend.
If a company has ₹5,00,000 in its CRR account, it can issue ₹5,00,000 worth of fully paid bonus shares to its shareholders.
However, it cannot use the CRR to pay dividends, meet expenses, or discharge liabilities.
70. Prohibition for buy-back in certain circumstances
70(1).
Companies are prevented from buying their own shares indirectly through other corporate entities that they control or influence.
It specifies three major prohibitions:
(a) Through Subsidiary Companies
A company cannot purchase its own shares through its subsidiary company, whether it is a wholly-owned subsidiary or partly owned.
This restriction exists because allowing a company to use its subsidiary for buy-back would be an indirect way of manipulating capital or artificially inflating the share price, which could mislead investors and regulators.
(b) Through Investment Companies or Group of Investment Companies
A company is also prohibited from conducting a buy-back through any investment company or group of investment companies.
An investment company primarily deals in buying and selling shares, and using it for buy-back could create conflict of interest, round-tripping of funds, or unfair market manipulation.
(c) When the Company Has Defaulted on Financial Obligations
If a company has made any default in its financial responsibilities, it is barred from buying back shares.
These defaults include:
Non-repayment of deposits (whether accepted before or after this Act came into force),
Non-payment of interest on such deposits,
Failure to redeem debentures or preference shares,
Non-payment of declared dividends to shareholders,
Default in repayment of any term loan or interest thereon to a banking company or financial institution.
However, the law also provides a relief provision which states that:
If the company has rectified or cured the default, and a period of three years has passed since the default ceased to exist, it may become eligible to buy back its shares again.
70(20).
Even if a company has no financial default, it cannot proceed with a buy-back if it has not complied with certain key statutory provisions.
These are Sections 92, 123, 127, and 129, which relate to core corporate governance and disclosure requirements:
(a) Section 92 — Annual Return
The company must have duly filed its Annual Return, containing details of its shareholders, directors, and shareholding pattern.
Failure to file the annual return reflects poor corporate governance, and hence, disqualifies the company from buy-back.
(b) Section 123 — Declaration of Dividend
This section ensures that dividends are declared only from genuine profits and not from capital.
If the company has violated dividend rules or failed to comply with Section 123, it cannot undertake a buy-back, since both involve distribution of funds to shareholders.
(c) Section 127 — Punishment for Failure to Distribute Dividend
If a company has declared a dividend but failed to distribute it within the prescribed time, it indicates non-fulfilment of shareholder rights.
Hence, the company loses the privilege of buying back its own shares until it becomes compliant.
(d) Section 129 — Financial Statements
Companies need to prepare true and fair financial statements in accordance with accounting standards.
If the company has not properly complied with financial statement requirements, it cannot be trusted to engage in sensitive financial transactions like a buy-back.
71. Debentures
71(1).
A company may issue debentures with an option to convert them into shares of the company, either fully or partly, at the time of redemption.
Therefore , instead of repaying the money in cash, the company can, at redemption, offer shares of equivalent value to the debenture-holders
This is known as a convertible debenture.
However, since conversion changes the ownership structure of the company by turning creditors into shareholders, the law requires special approval.
Hence, such an issue must be approved by a special resolution passed in a general meeting of shareholders.
71(2).
Companies are barred from issuing debentures carrying voting rights.
Debenture-holders are creditors, not owners, of the company and their rights are limited to receiving interest and the repayment of principal.
Allowing them voting power would blur the distinction between ownership (equity) and creditorship (debt), hence the law strictly bars such voting privileges.
71(3).
A company may issue secured debentures, meaning that the repayment of principal and interest is backed by specific assets of the company as security.
However, such issuance must comply with the terms and conditions prescribed by the Central Government or the regulatory authorities.
These terms ensure that:
The security provided is sufficient to cover the debenture liability,
The company does not over-leverage itself, and
The interests of debenture-holders are adequately safeguarded.
71(4).
When a company issues debentures, it is legally required to create a Debenture Redemption Reserve (DRR) from its profits that are otherwise available for paying dividends.
This reserve acts as a safety buffer to ensure that the company has sufficient funds to redeem the debentures when they mature.
The law further mandates that the amount credited to the DRR cannot be used for any other purpose and it can only be utilised for redeeming debentures.
71(5).
Before issuing a prospectus or making an offer or invitation to the public (or to more than five hundred members) for subscribing to debentures, the company must appoint one or more Debenture Trustees.
This is a mandatory investor protection mechanism.
Debenture trustees act as independent guardians of the debenture-holders’ interests.
The law also provides that the conditions governing their appointment shall be prescribed by rules to ensure that only qualified and reliable persons are appointed to this sensitive role.
71(6).
A debenture trustee is responsible for protecting the interests of debenture-holders and addressing their grievances.
The trustee must:
Ensure that the company complies with all terms and conditions of issue,
Safeguard the security against which the debentures are issued, and
Take prompt action if the company defaults or fails to maintain adequate assets.
The Central Government may prescribe detailed rules specifying the duties, powers, and obligations of such trustees.
71(7).
Any provision in a trust deed or related contract that seeks to exempt the trustee from liability for breach of trust shall be void if the trustee fails to show the due care, diligence, and responsibility required of him.
In other words, trustees cannot escape liability for negligence or misconduct by relying on protective clauses in the deed.
However, there is an exception:
If three-fourths in value of the total debenture-holders, by majority at a duly held meeting, agree to limit or modify the trustee’s liability, such exemptions may be permitted.
71(8).
The company must strictly adhere to the payment of interest and timely redemption of debentures as per the terms and conditions mentioned at the time of issue.
This clause reinforces that debentures are contractual obligations, and any delay or failure to honour them can invite legal and regulatory consequences.
71(9).
If at any point the debenture trustee believes that the company’s assets are insufficient or are likely to become insufficient to meet the repayment obligations, they can approach the National Company Law Tribunal (NCLT).
The Tribunal, after hearing the company and other interested parties, may impose restrictions on the company such as limiting new borrowings or liabilities to protect the debenture-holders.
This provision empowers the trustee to act proactively, preventing a financial crisis before it happens.
71(10).
If the company fails to redeem the debentures on maturity or fails to pay interest when due, the debenture-holders or the debenture trustee may apply to the NCLT.
The Tribunal, after hearing all parties, may order the company to immediately redeem the debentures and pay the due principal and interest.
71(11). Omitted
71(12).
A contract made with the company to take up and pay for any debentures is legally enforceable through a decree for specific performance.
This means that if an investor or underwriter agrees to purchase debentures and then fails to do so, the company can legally compel them to fulfil the contract.
71(13).
Finally, the Central Government holds the power to lay down detailed procedures and guidelines regarding:
The method and security for issuing debentures,
The standard format of the debenture trust deed,
The procedure for debenture-holders to inspect or obtain copies of the trust deed,
The quantum of the Debenture Redemption Reserve, and
Any other related matters necessary for effective implementation of this section.
Section 72. Power to nominate
72(1).
Every holder of securities (whether it be shares, debentures, or any other form of security issued by the company) has the legal right to nominate another person in the prescribed manner.
This essentially means:
At any point during their lifetime, the holder can formally name a nominee, someone who will automatically become the owner of those securities after the holder’s death.
The nomination must be made in writing and in the form prescribed under the Companies (Share Capital and Debentures) Rules, usually by submitting a Nomination Form (Form SH-13) to the company.
72(2).
When securities are held jointly by more than one person (say, two or three co-owners), they too have the right to make a nomination — but it must be done jointly by all holders together.
In such a case:
The joint holders can together nominate one person who will become entitled to the securities after the death of all joint holders.
The nominee’s right arises only after the last surviving holder passes away.
72(3).
It states that a valid nomination overrides all other legal documents or claims, such as:
A will or testamentary disposition,
Any family settlement, or
Any other form of inheritance claim under personal or succession laws.
So, if a valid nomination has been made as per law:
The nominee alone becomes the rightful owner of the securities,
To the exclusion of all other persons (including legal heirs),
Unless the nomination is cancelled or varied in the prescribed manner (usually by submitting Form SH-14 to modify or cancel the nomination).
72(4).
If the person being nominated is a minor, the law allows the holder to appoint another person, known as a guardian or custodian, to hold the securities on behalf of the minor nominee until the nominee reaches adulthood.
