Company Law and Practice · Debt Instruments - Concepts

Issue of Debentures and Debenture Trust Deed under Section 71

Updated 11 October 2026 · Fact-checked

Debentures are issued under Section 71 of the Companies Act, 2013. The company must appoint debenture trustees before offering debentures to the public or to more than 500 members, execute a trust deed, create a debenture redemption reserve where required, and pay interest and redeem as per the terms of issue.

Understand Issue of Debentures and Debenture Trust Deed

A debenture is a debt instrument. The holder lends money to the company and is a creditor, not a member. Section 71 is the main provision on issuing debentures. Your answers should start from it.

The Act sets a few basic rules. A company cannot issue debentures carrying voting rights (Section 71(2)). A company may issue debentures that can be converted into shares, wholly or partly, at redemption. But such an issue needs approval by a special resolution at a general meeting (Section 71(1) proviso). Secured debentures may be issued on the prescribed terms and conditions (Section 71(3)).

Before the company issues a prospectus, or invites the public or more than 500 members to subscribe for debentures, it must appoint one or more debenture trustees (Section 71(5)). The conditions of appointment are prescribed in the Rules. The trustee acts for the debenture-holders. Its job is to protect their interests and redress their grievances (Section 71(6)). The terms are usually set out in a debenture trust deed, which secures the issue.

Section 71(4) requires a debenture redemption reserve (DRR) account to be created out of profits available for payment of dividend. The amount credited cannot be used except to redeem debentures. The quantum of DRR, the form of trust deed and the inspection procedure are left to the Central Government to prescribe (Section 71(13)). Do not quote percentages unless you are sure of the current Rules.

If the company defaults, the law gives remedies. The trustee can approach the Tribunal if assets are or may become insufficient (Section 71(9)). Holders or the trustee can apply to the Tribunal if the company fails to redeem on maturity or to pay interest when due (Section 71(10)).

Key rules to remember

Voting rights: Debentures with voting rights: not allowed; Section 71(2). Debenture-holders are creditors, so no company can give debentures voting rights.
Convertible debentures: Option to convert into shares (wholly or partly) at redemption → special resolution at a general meeting; Section 71(1) and its proviso.
Trustee requirement: Public offer, or offer to more than 500 members → appoint one or more debenture trustees before the issue; Section 71(5). The word is 'exceeding five hundred', so exactly 500 is not covered.
Debenture redemption reserve: DRR created out of profits available for dividend; use only for redemption of debentures; Section 71(4). The quantum is as prescribed under Section 71(13).
Trustee exemption clauses: Clause exempting or indemnifying a trustee for breach of trust (no due care shown) → void; Section 71(7). Proviso: exemptions may be agreed by holders of at least three-fourths in value of debentures at a meeting held for the purpose.
Specific performance: Contract to take up and pay for debentures → enforceable by decree of specific performance; Section 71(12).

How to solve Issue of Debentures and Debenture Trust Deed questions

Use this order for any question on issue of debentures, trustees or the trust deed.

1Identify the type of debenture in the facts: convertible, secured, offered to the public or to more than 500 members.
2State the main rule from Section 71 that applies, with the sub-section.
3Check the conditions: special resolution for convertibility, trustee appointed before the offer, no voting rights.
4Check reserve and security points: DRR out of profits available for dividend, and the secured debenture terms as prescribed.
5Apply the rule to the facts, noting the numbers given such as 500 members or three-fourths in value.
6If there is a default, name the remedy: trustee petition under Section 71(9) or Tribunal order under Section 71(10).
7Write a clear conclusion that answers the exact question asked.

Quickest way: Section 71 checklist

When to use it: Use this for short-note and case-based questions when time is tight.

Write the section number first: Section 71.
List the four pillars: no voting rights, special resolution for conversion, trustee, DRR.
Add the trustee trigger: public or more than 500 members, before the offer.
Add the remedy: Tribunal under sub-sections (9) and (10).
Finish with a one-line conclusion tied to the facts.

Common mistakes in Issue of Debentures and Debenture Trust Deed

Saying debentures can carry voting rights if the articles allow it.
Students confuse debenture-holders with shareholders.
Fix: Remember Section 71(2): no company shall issue debentures carrying voting rights. Articles cannot override it.
Saying a trustee is needed for every debenture issue.
Students remember 'trustee' but forget the trigger.
Fix: Section 71(5) applies to a prospectus, a public offer, or an offer to members exceeding 500. Quote the trigger.
Appointing the trustee after the offer is made.
Timing words are overlooked.
Fix: The trustee must be appointed before the issue or offer. Write 'before such issue or offer'.
Treating DRR as freely usable reserve.
Students think of it like a general reserve.
Fix: Section 71(4): the amount cannot be used except to redeem debentures. It is created out of profits available for dividend.
Requiring only an ordinary resolution for convertible debentures.
Students mix this with routine board decisions.
Fix: The proviso to Section 71(1) requires a special resolution at a general meeting.
Stating DRR percentages or trust deed forms from memory as Act provisions.
Students mix the Act with the Rules.
Fix: Say these are prescribed under Section 71(13). Give figures only if sure of the current Rules.

Worked examples

Example 1

Sundaram Textiles Ltd. plans to issue debentures to 800 of its members and the public. It has not yet appointed any debenture trustee. The directors say a trustee can be appointed after the money is raised. Advise the company.

Show the solution

Provision: Section 71(5) bars a company from issuing a prospectus or making an offer or invitation to the public, or to its members exceeding 500, for subscription of debentures unless it has appointed one or more debenture trustees before the issue or offer.
Facts: the offer goes to the public and to 800 members. 800 exceeds 500, so the section applies.
Analysis: the law requires appointment before the offer, not after raising money. The directors' view is wrong.
The conditions of appointment are as prescribed, and the trustee must protect holders' interests under Section 71(6).

Answer: The directors are wrong. Sundaram Textiles Ltd. must appoint one or more debenture trustees before making the offer or issuing the prospectus, as required by Section 71(5).

Example 2

Kaveri Industries Ltd. wants to issue debentures that the holder may convert wholly into equity shares at redemption. The board has passed a resolution approving this. Is the issue valid? Also, can the company give these debenture-holders one vote per debenture at general meetings?

Show the solution

Provision: Section 71(1) allows debentures with an option to convert into shares, wholly or partly, at redemption.
The proviso requires approval by a special resolution passed at a general meeting. A board resolution alone is not enough.
Second part: Section 71(2) says no company shall issue any debentures carrying any voting rights.
Application: the voting rights proposal is prohibited, even for convertible debentures. Holders may vote only after conversion, when they become members.

Answer: The issue is not valid on a board resolution alone. A special resolution at a general meeting is needed under the proviso to Section 71(1). The company cannot give voting rights to debentures, as Section 71(2) prohibits it.

Exam tips

Begin every answer with Section 71 and the sub-section that decides the point.
Learn the numbers exactly: more than 500 members, three-fourths in value, special resolution.
For case questions, apply the rule to the facts in two or three lines and then conclude.
Use the Tribunal remedies in sub-sections (9) and (10) to score in default-based questions.
Leave out Rules details you cannot recall. Say 'as prescribed' instead.

Practice questions from Debt Instruments - Concepts

Issue of Debentures and Debenture Trust Deed in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Issue of Debentures and Debenture Trust Deed: frequently asked questions

What is the debenture trust deed?

It is the document that secures the issue of debentures and sets the terms between the company and the trustee for the holders. Its form and the way holders can inspect it and get copies are prescribed under Section 71(13).

When must a company appoint a debenture trustee?

Before it issues a prospectus or makes an offer to the public, or to its members exceeding 500, for subscribing to debentures. This is in Section 71(5). The conditions of appointment are as prescribed.

What is the debenture redemption reserve?

It is an account the company creates out of profits available for dividend when it issues debentures. The amount in it cannot be used except to redeem debentures. Section 71(4) states this, and the quantum is as prescribed.

Can a debenture trustee be excused from liability?

A clause that exempts a trustee from liability for breach of trust, or indemnifies the trustee, is void where the trustee fails to show due care and diligence. Section 71(7) allows exemptions agreed by holders of at least three-fourths in value at a meeting held for the purpose.

What can debenture-holders do if the company fails to pay?

If it fails to redeem on maturity or to pay interest when due, holders or the trustee may apply to the Tribunal. The Tribunal can direct redemption forthwith on payment of principal and interest due, under Section 71(10).