How to issue debentures and bonds ?
by : DR. T.K. JAIN AFTERSCHO☺OL centre for social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india FOR – PGPSE PARTICIPANTS mobile : 91+9414430763 5 DECEMBER 09
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Why debenture ? They are fixed interest bearing instruments, and therefore they reduce overall cost of capital of the company. Suppose a company has cost of equity of 30%, it issues issue s debenture, which costs 15% , the company is able to reduce the cost of overall capital and thus its market value will increase. But debentures / loans should be upto certain limits, otherwise, the cost of equity will also go up and there will be questions about viability of the company. 5 DECEMBER 09
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What is a debenture ?
Sec. 2 (12) : it includes debenture stock, bonds or other securities of a company whether constituting a charge on the company's assets or not.
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What is yankee bond? A bond issued in the US market by the foreign banks and companies. As per Securities Act (USA) 1933 : these bonds must be registered re gistered with SEC before they can be sold. They are issued in tranches and each offering can be as large as 100 Crore $. 5 DECEMBER 09
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Zero coupon bond ?
A debt security that doesnt pay interest, but it is issued at deep discount but it is redeemed at its face value. It is also called Accrual or Deep discount bond.
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Types of debentures ?
Redeemable or irredeemable (irrideemable debentures are not allowed in India). Convertible (into equity) or non-convertible secured or non-secured registered or bearer 5 DECEMBER 09
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What is debenture trust deed? (sec. 117A) As per SEBI (debenture trustees) regulations 1993 and SEBI Guidelines 2000, a company c ompany which issues debenture will have to appoint trustees of debentures. These trustees will sign an agreement when debentures are issued. These trustees will safeguard the interests of debenture holders. 5 DECEMBER 09
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Duties of debenture trustees? (a) to ensure that the assets of the company issuing debentures and each of the guarantors are sufficient to discharge the principal p rincipal amount at all times; (b) to satisfy himself that the prospectus or the letter of offer does not contain any matter which is inconsistent with the terms of the debentures or with the trust deed; (c) to ensure that the company does not commit any breach of covenants and provisions of the trust deed; (d) to take such reasonable steps to remedy any breach of the covenants of the trust deed or the terms of issue of debentures; (e) to take steps to call a meeting of holders of debentures as and when such meeting is required to be held.
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Contents of debenture trust deed? Rights of debenture holders rights and responsibilities of company matters regarding terms of appointment of trustees rights of trustees other details. 5 DECEMBER 09
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Debenture redemption reserve (sec. 117C)
It is compulsory for company to create debenture redemption reserve.
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Who can be debenture trustee?
A scheduled bank an insurance company a public financial institution a body corporate
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Who cant be debenture trustee?
A shareholder a guarantor of the company
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Time limit for creating debenture trust deed?
3 months of issue of debenture
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How to redeem debenture? Lump sum payment method drawing of lots method purchase in open market convert to equity redemption out of capital out of profit 5 DECEMBER 09
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What is a charge ?
It is a security provided to secure loan
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Types of charge ?
Fixed charge – when underlying assets remain same. Example : building, land etc. floating charge – where underlying assets keep chaning example : stock, debtors
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How to register a charge?
As per sec. 125, a company has to register a charge with ROC (registrar of companies) in 30 days of creation of charge.
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When will a floating charge crystalise (convert into fixed charge )? 1. winding up / liquidation 2. when a company ceases to carry on business 3. when the debenture holders take some step against company for this 4. when there is some event specifying such as per agreement 5 DECEMBER 09
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Register of charge ?
As per sec. 143, every company will have to keep a register of charge at its registered office, which can be inspected by any member / creditor without any fees. (sec. 144) and by others on payment of fees of Rs. 10 during business hours 5 DECEMBER 09
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What type of charges have to be registered ? Charge for debenture floating charge charge on uncalled up share capital charge on calls made but not paid charge on ship , movable property (other than a pledge ) charge on immovable property a charge on book debt a charge on goodwill, patent, licence etc. (sec. 125(4) 5 DECEMBER 09
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What will happen if you dont register charge? Charge is valid against company, but void against company creditors can still receive the payment against them. Security becomes void – but it doesnt affect a ffect obligations of the company. 5 DECEMBER 09
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Modification of charge ? Sec. 135
Once you modify any condition in charge, you have to register it in 30 days in form 8 with ROC.
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What is mortgage ?
Sec. 58 of Transfer of property act 1882 : interest in immovable property for securing payment
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Types of mortgage
Usufructuary mortgage english mortgage simple mortgage anomalous mortgage mortgage by deposit of title 5 DECEMBER 09
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Difference between mortgage, pledge and lien hypothecation ? Mortgage is about immovable property hypothecation is about movable property like car, truck etc. Pledge is about stock or such things which can change. Lien is also to secure loan – in lien the property is given to the lender (creditor) 5 DECEMBER 09
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What is ECB? When an Indian company borrows from other countries, it is called ECB (external commercial borrowing). The RBI gives policies regarding ECB. It includes buyer / supplier credit, commercial loans, and other loans from foreign markets. It also include floating rate notes, convertible bonds from foreign banks. 5 DECEMBER 09
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Ceiling limit on public deposit that can be taken .. rule 3(2) Deposits against debentures / shares etc. From shareholders : 10% of paid up capital ca pital + reserves govt. Company can get upto 35% of paid up capital + reserves from other public for other companies : max. 25% of paid up capital + reserves rese rves 5 DECEMBER 09
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Advertisement (rule 4)
Proper advertisement in specified format must be given in english + vernacular newspapers and a copy of this must be given to Registrar duly signed by director
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Statement in lieu of advertisement
Rule : 4A : when you dont issue iss ue advertisement, file this.
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Register of deposit (rule 7)
Maintain proper register of deposits / debentures etc. – with details like name, amount, address, particulars of the depositor de positor
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Declarations about debentures & Deposits ....
Whenever a company goes for IPO / FPO nd (follow on public issue – 2 public issue ) , or any other issue, it will have to submit a declaration that it has not defaulted in redemption of debentures / deposits 5 DECEMBER 09
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