Question

Justify the following statement: A company can issue only certain types of debentures.

Hint:

The law ensures debentures are a safe debt instrument. Remember the key restrictions to protect investors: {No Vote}, {Must be Secured}, and {Must be Redeemable}.

Answer 1

This statement is correct. To protect the interests of investors, the Companies Act, 2013, and SEBI regulations impose significant restrictions on the types of debentures a company is permitted to issue. The key provisions are:

No Voting Rights: Section 71(2) of the Companies Act, 2013, explicitly prohibits any company from issuing debentures that carry voting rights. This ensures that managerial control is retained by the equity shareholders and debenture holders remain as creditors only.
Must be Secured: Companies are generally required to issue secured debentures. This means the debentures must be backed by a charge on the company's assets, which provides a safety net for investors. The issue of unsecured debentures is highly restricted and generally not permitted for public issues.
Must be Redeemable: A company cannot issue irredeemable (or perpetual) debentures. All debentures must have a specific maturity date and must be repaid. The maximum tenure for secured debentures is generally 10 years, though certain infrastructure companies can issue them for up to 30 years.
Creation of Debenture Redemption Reserve (DRR): Companies that issue debentures must create a DRR from their profits. This reserve ensures that the company sets aside adequate funds over the life of the debentures to be able to repay the principal amount upon maturity.
Because of these stringent legal requirements, a company cannot issue debentures in any form it desires (e.g., irredeemable, with voting rights, etc.). It must conform to the legally permitted types.