CS Executive · Company Law and Practice
Debt Instruments - Concepts for CS Executive Company Law
Debt instruments are how a company borrows, mainly through debentures. A debenture acknowledges a debt and gives the holder interest and repayment, not ownership or voting rights. To answer questions, state the Section 71 rule, apply it to the facts, then give a clear conclusion.
What this chapter covers
This chapter in Paper 2, Company Law and Practice, covers how a company raises money by borrowing instead of selling shares. The main topic is the debenture. You learn what it is, how it differs from a share, the kinds of debentures, how they are issued and the role of the debenture trust deed and trustee. Section 71 of the Companies Act, 2013 is the anchor for almost all of it.
The chapter also touches related provisions. A debenture-holder is a creditor, not a member. Section 113 lets a body corporate that holds debentures authorise a representative for creditors' meetings. Section 62(3) allows debentures with a conversion option to turn into shares without a fresh rights offer, provided the terms were approved by special resolution before the debentures were issued. The last topic in your list, special user rights, links to Section 378ZC on Producer Companies. Read how your ICSI study material frames it.
This chapter sits between share capital and the later chapters on charges, borrowing powers and meetings. If you know who a debenture-holder is and what rights the holder has, the chapters on charges and company administration become easier. Questions here are mostly theory, so your marks depend on precise provisions and clear conclusions.
This chapter is compact, rule-based and easy to score in a written paper. Section 71 has short, specific conditions: a special resolution for convertible debentures, no voting rights, a debenture trustee for larger offers, a redemption reserve and Tribunal remedies. Examiners can test each of these as a short note or a small fact-based question. Because you must write in the ICSI style (provision, analysis, conclusion), a student who quotes the rule accurately and applies it to the facts gains clear advantage over one who writes general descriptions. The chapter also supports your answers on share capital, charges and meetings.
Debt Instruments - Concepts: topics in the order to study them
- 1Meaning and Features of DebenturesStart here. Everything else depends on knowing that a debenture is a debt, not ownership, and how it differs from a share.
- 2Types and Classes of DebenturesOnce you know the basic idea, learn the classifications (secured or unsecured, convertible or not, redeemable or not, and so on) so the later rules make sense.
- 3Issue of Debentures and Debenture Trust DeedThis is the core of Section 71 and the most examinable part, so study it after the concepts and types are clear.
- 4Special User Rights in Debt InstrumentsStudy it last. It is a narrower topic that sits on top of the basics. Section 378ZC deals with special rights of active members of a Producer Company, so check how your ICSI material links it to this chapter.
How to prepare Debt Instruments - Concepts
Treat this as a short provisions chapter. Learn the rules first, then practise writing them in the ICSI style.
- Read Section 71 once in full. Then rewrite each sub-section in one line of your own words.
- Make a two-column note: debenture versus share. Cover ownership, return, voting, repayment and the status of the holder (creditor or member).
- List the classifications of debentures and write one line of meaning and one practical point for each.
- Build a checklist for issue: special resolution for conversion, no voting rights, redemption reserve, debenture trustee, trust deed. Be able to recall it without looking.
- Link Section 71 with Section 62(3) and Section 113 so you can handle conversion and creditors' meetings questions.
- Read Section 378ZC and the ICSI material together for the special user rights topic. Note who can hold such rights and how instruments can be transferred.
- Practise two or three short answers in the format: provision, facts, conclusion. Check each one against the Act's exact words.
Common mistakes in Debt Instruments - Concepts
Treating a debenture-holder as a member or owner of the company.
Fix: Write one line in every answer: the holder is a creditor and receives interest. Add that Section 71(2) bars voting rights.
Saying every debenture issue needs a debenture trustee.
Fix: State it exactly: a trustee is needed before a prospectus, or an offer to the public or to more than five hundred members, for subscription of debentures (Section 71(5)).
Mixing up the approvals for convertible debentures under Section 71 and Section 62.
Fix: Section 71(1) needs a special resolution for the convertible issue. Section 62(3) exempts conversion from the rights-offer rules if the terms were approved by special resolution before the issue.
Quoting the redemption reserve rate or exemptions from memory.
Fix: Say that the reserve is created out of profits available for dividend under Section 71(4) and the quantum is as prescribed. Give figures only if you are sure of the current rules.
Writing generic definitions with no section reference or conclusion.
Fix: For each answer, give the provision with its section, apply it to the facts, then close with a one-line conclusion.
Assuming Section 378ZC covers debentures or ordinary companies.
Fix: Remember that Section 378ZC concerns active members of a Producer Company. Read your ICSI material to see how the topic is presented and answer within that scope.
Last-day revision: Debt Instruments - Concepts
- A debenture is a debt of the company. The holder is a creditor, not a member.
- Section 71(1): convertible debentures need a special resolution passed at a general meeting.
- Section 71(2): no company can issue debentures carrying voting rights.
- Section 71(3): secured debentures can be issued on prescribed terms and conditions.
- Section 71(4): the company creates a debenture redemption reserve out of profits available for dividend, and uses it only to redeem debentures. The quantum is as prescribed.
- Section 71(5): a debenture trustee must be appointed before an offer to the public, or to more than five hundred members, for subscription of debentures.
- Section 71(6): the trustee protects the interests of debenture-holders and redresses their grievances.
- Section 71(8): the company must pay interest and redeem as per the terms of issue.
- Section 71(9) and (10): the trustee or holders can go to the Tribunal over insufficient assets or failure to redeem or pay interest.
- Section 71(12): a contract to take up and pay for debentures can be enforced by specific performance.
- Section 62(3): a conversion option approved by special resolution before issue needs no rights offer under Section 62.
- Section 378ZC: active members of a Producer Company may have special rights if the articles provide for them. The instruments are transferable to another active member after Board approval.
Debt Instruments - Concepts practice questions
- Kaveri Foods Ltd wishes to issue debentures that the holder can opt to convert wholly or partly into equity shares at the time of redemption…
- Zenith Agro Ltd. plans to issue non-convertible debentures through a public offer to raise funds. Under the Companies Act, 2013, which step …
- Under the Companies Act, 2013, who may be given special rights, and through which route can a Producer Company issue instruments for them?
- Sundaram Textiles Ltd proposes to issue debentures to raise funds and its Managing Director suggests giving debenture-holders a right to vot…
- Tara Infra Ltd issued secured debentures to the public and the debenture trustee concludes that the company's assets are, or are likely to b…
- Kaveri Foods Ltd wishes to issue debentures that the holder may convert, wholly or partly, into equity shares at the time of redemption. Wha…
- Kaveri Foods Ltd plans to issue debentures carrying one vote per debenture at general meetings, to attract lenders who want a say in managem…
- Himalaya Infra Ltd defaulted on redemption of its debentures on the maturity date. The debenture trustee wants the company compelled to pay.…
Debt Instruments - Concepts in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Debt Instruments - Concepts: frequently asked questions
What is the most important section in the Debt Instruments chapter?
Section 71 of the Companies Act, 2013 is the core. It covers convertible debentures, the bar on voting rights, secured debentures, the redemption reserve, debenture trustees and Tribunal remedies. Learn it sub-section by sub-section.
Can a company issue debentures with voting rights?
No. Section 71(2) says no company shall issue any debentures carrying any voting rights. This is one of the clearest points to use when you separate debentures from shares.
When must a company appoint a debenture trustee?
Before it issues a prospectus or makes an offer or invitation to the public, or to its members exceeding five hundred, for subscription of its debentures. Section 71(5) sets this rule. The conditions for appointment are as prescribed.
Do convertible debentures need a rights offer when converted into shares?
Not if the terms of issue, including the conversion option, were approved by a special resolution before the debentures were issued. Section 62(3) exempts such conversion from Section 62. The issue itself also needs a special resolution under Section 71(1).
Is this chapter mostly theory or numerical?
It is mostly theory and provisions. Paper 2 is a written paper, so you earn marks by stating the rule accurately, applying it to the facts and giving a clear conclusion.