Debentures

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manju (Querist)
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26 November 2010 Dear Sir,

Whether a private company can issue debentures? what are procedure to be adopted? explain me in brief

thanks and regards

CS Mitesh Mehta

CS Mitesh Mehta (Expert)
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03 December 2010 Yes a private limited company can issue debenture but such Private Company must issue Debentures only as a Secured Debenture.

There are 2 reasons behind issuing Secured Debenture only:

1. Under the Companies (Acceptance of Deposit) Rules, 1975 “any amount raised by issue of debentures (including convertible debentures) secured by the mortgage of any immovable property of the company and that the market value of the immovable property secured is higher than the amount of debentures issued” is not considered to be a DEPOSIT.

2. Under Section 3(1)(d) of the Act, a Private Company is prohibited from accepting Deposit from persons other than its Directors, Members and their relatives.

The following approvals are required to be obtained by the Company through resolution in board meeting:

1. Board approval for issue of Debentures under Section 292(1)(b).
2. Board approval for Creation / Declaration of Trust
3. Board approval for Appointment of Debenture Trustees (Section 117B)
4. Board Approval of Draft Trust Deed
5. Board Approval of the Form of Debenture Certificate.
6. Letter from Trustees Consent from the Debenture Trustees to act as Trustees.

No approvals are required to be obtained under Section 293(1)(a) and (d) since, the Section does not apply to Private Limited Companies, unless it is a Subsidiary of a Public Company.

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