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Issue of Debentures - Section 295

29 June 2010

Can any one advise on the following:

A public company intends to issue debentures to its promoter group company with common director. Does it attract Section 295 of the Companies Act, 1956??

Any change in your opinion if debentures so issued are Fully Convertible Debentures??

Moreover, in any case, are debentures or Fully Convertible Debentures covered under the "Loans" in terms of Section 295???

Thanks and regards

Deepak Maharishi

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24 Replies

(Guest)

There are 2 Reasons, Why Company can Issue both types of Debentures i.e. Convertible or Non-Convertible to Promoters

(1) Section 295 is Loan to Directors and not Loan By directors

So, Debenture part doesn’t attract the Section 295

(2) Moreover, Company can issue the Debentures to the Small groups i.e. Promoters or His relatives, there is no bar on the same…

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Ankur Shah (Practicing Company Secretary)

Ahmedabad, Gujarat - 380015

Mobile: +91-90330 03922, 94276 33901

E-Mail: ankur @ csankur.com

Website: www.csankur.com

Blog: www.csankur.blogspot.com

Deepak Maharishi (CS) (514 Points)
Replied 30 June 2010

Can you please refer to or forward me the source where I can see the relevant extract???

Thanks and regards

Deepak Maharishi

Yogesh Bhatt (Company Secretary) (475 Points)
Replied 30 June 2010

I agree with ankur.

Deepak Maharishi (CS) (514 Points)
Replied 30 June 2010

Dear Yogesh and Ankur,

Would be great if you can refer to the relevant provision / case law or any other thing in this regard

Thanks and regards

Deepak Maharishi

Deepak Maharishi (CS) (514 Points)
Replied 30 June 2010

Why am concerned about this is coz "Loan" is not defined in the Companies Act, 1956 except Section 372A which includes Debentures but for that Section only.

Thanks and regards

Deepak Maharishi

(Guest)

Look at the Section 295, It clearly says that Loan to Directors and not Loan by Directors, That’s why It doesn’t came into the purview of the Section 295..

The Main subject matter is not covered U/S 295, then It is worthless to give opinion that Whether Debenture is Loan or not???

(Guest)

It’s like the On the basis of the Main subject Matter, The court has dismissed the Plea, then It’s obvious that Court will not decide on which grounds the plea has been introduced, Because the Main element of the plea is not there or not traceable…

Deepak Maharishi (CS) (514 Points)
Replied 30 June 2010

I could not relate with your concern of Loan to director and Loan by director.

All i was asking that whether debentures shall be considered at par with a loan....in other words debentures come under the category of loan??

There are two companies A Ltd. and B Pvt. Ltd.

Mr. X is director in both the companies. Now If A gives loan to B it comes under 295.

My question was if B issues debentures to A and then (quite obviously) A Ltd. subscribe to the debentures and gives money to B Pvt. Ltd. then would it also come under Section 295??

Am not able to correlate this transaction with "Loan by Director"!!

Ankur Garg (Company Secretary and Compliance Officer) (114773 Points)
Replied 30 June 2010

Deepak sir, plz try and understand ---your company is going to issue debentures to promoter group company with common directors---by this way company is borrowing from directors and not giving loan to them...hence section 295 (Loan to Director) not applicable.

Here directors are providing funds to the company by investing in the debenture issue of the company. So this is the case of Loan by director to the company which is outside the preview of section 295.

Deepak Maharishi (CS) (514 Points)
Replied 30 June 2010

Agreed Ankur Sir, thats what the outcome my above given example.

Let me make a shift to my main aspect - Debentures.

Considering a situation where loan is given by a company to a private company by way of subscribing its debentures (where director is common).

Now the situation is as per section 295. My question is for Debentures. Will subscribing to the Debentures be called as "Loan".

Again I would like to clarify :

With director common, A Ltd. is giving loan to B Pvt. Ltd. by subscribing to its debentures. Does it come under 295??

Thanks and regards

Deepak Maharishi

Ankur Garg (Company Secretary and Compliance Officer) (114773 Points)
Replied 30 June 2010

Perfectly understand your query now...

According to me subscribing to the debenture is equal to providing loan and same transaction is falling under section 295(1)(c). Here exemption u/s 295(2)(a)(i) not available keeping in view your example.

Let's wait for other expert opinions.

Deepak Maharishi (CS) (514 Points)
Replied 30 June 2010

Now we are at same platform sir.

Considering all things remain same, Now I come back to most important 2 queries:

1. What is the scenario if my company buys out debentures from current holder. That means the current holder is no where related to my other company (which had issued such debentures) or my company.

Eg. = B Pvt Ltd issued debentures to ABC bank and now A Ltd. (my company in which director is common with B Pvt. Ltd.) want to buy out those debentures from ABC Bank. Here important thing is B Pvt. Ltd. is not issuing any new debentures to A Ltd. and rather A Ltd. is buying those debentures from ABC Bank and post this ABC Bank.

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Considering all thing remain same, please see my 2nd query and advise:

2. You said Debentures shall be considered as a loan and would come under Section 295.

Question is whether Fully Convertible Debentures (either in euqity or preference shares) would also come under "Loan" and thus covered under 295??

Thanks and regards

Deepak Maharishi

Deepak Maharishi (CS) (514 Points)
Replied 30 June 2010

Can someone please help on the issues highlighted just above?

regds

Deepak Maharishi

Ankur Garg (Company Secretary and Compliance Officer) (114773 Points)
Replied 30 June 2010

1. Section 295 applicable bcoz of the use of word directly or indirectly in section 295(1). If you avoid this interpretation and allow the purchase from bank then ROC may object later.

2. Again section 295 applicable. Bcoz according to me debenture is in the category of loan so section 295 attracts as soon as denentures issued by the company whether convertible or non-convertible.

Revert with contrary views.

Regards