Strategic Management and Corporate Finance · Raising of Funds from Debt and Procedural Aspects

Issue of Debentures: Procedure and Compliance Under Companies Act

Updated 11 October 2026 · Fact-checked

Issue of debentures is governed mainly by section 71 of the Companies Act, 2013. A company issues debentures by public offer or private placement (section 42), appoints a debenture trustee where the statutory threshold is crossed, creates a debenture redemption reserve where required, and files returns. Solve questions by taking approvals, mode, trustee, security, reserve and filings in order.

Understand Issue of Debentures: Procedure and Compliance

A debenture is a debt instrument. The company borrows money and promises to pay interest and repay the principal as per the terms of issue. Debenture-holders are creditors, not members. This is why section 71(2) bars any debenture carrying voting rights.

Section 71 is the core provision. A company may issue debentures with an option to convert them into shares, wholly or partly, at the time of redemption. Such an issue needs approval by a special resolution passed at a general meeting. Secured debentures may be issued on the prescribed terms.

The mode of issue decides the rest of the procedure. A public company may offer debentures to the public through a prospectus (section 23(1)(a)) or by private placement (section 23(1)(b)). A private company can use private placement only for debentures, since it cannot offer securities to the public. Private placement is made only to identified persons, within the limit in section 42(2), by a private placement offer-cum-application. The offer cannot carry a right of renunciation.

Section 71(5) requires a debenture trustee. No company may issue a prospectus or make an offer or invitation to the public, or to more than five hundred members, for subscription of debentures unless it has first appointed one or more debenture trustees. The trustee protects the debenture-holders' interests and redresses their grievances (section 71(6)). Any clause in a trust deed that exempts the trustee from liability for breach of trust, where he fails to show due care and diligence, is void (section 71(7)). The proviso allows exemptions agreed by debenture-holders holding not less than three-fourths in value at a meeting held for that purpose.

Section 71(4) requires a debenture redemption reserve (DRR) account, created out of profits available for payment of dividend. It can be used only to redeem debentures. The quantum, and the classes of company that must create it, are set by the Rules. Check the Rules for the exact percentages and exemptions. Do not quote figures from memory without checking the Rules.

Key rules to remember

Convertible debentures: Option to convert wholly or partly into shares at redemption → special resolution at a general meeting (s. 71(1) proviso); Applies to the issue of debentures with a conversion option.
No voting rights: No company shall issue debentures carrying voting rights (s. 71(2)); Debenture-holders are creditors, not members.
Debenture trustee threshold: Offer to public, or to members exceeding 500 → appoint trustee before the offer (s. 71(5)); Appointment must come before the issue or offer, not after.
Trustee liability: Clause exempting trustee from breach-of-trust liability is void if he fails to show due care (s. 71(7)); exemption allowed if agreed by holders of ≥ 3/4 in value at a meeting; Remember the three-fourths in value condition.
DRR: Create DRR out of profits available for dividend; use only for redemption (s. 71(4)); quantum per Rules (s. 71(13)); State the principle from the Act and the percentage from the Rules.
Private placement limits: Identified persons ≤ 50 (or higher prescribed number), excluding QIBs and ESOP employees, in a financial year (s. 42(2)); Non-compliance with s. 42(2) makes the issue a public offer (s. 42(11)).
Allotment and refund: Allot within 60 days of receiving application money; else refund within 15 days after the 60 days; later delay attracts 12% p.a. interest from the 60th day (s. 42(6)); Money is kept in a separate bank account in a scheduled bank.
Return of allotment: File return of allotment with Registrar within 15 days of allotment (s. 42(8)); Penalty: ₹1,000 per day of default, up to ₹25 lakh (s. 42(9)).
Remedies: Default in redemption or interest → Tribunal may direct redemption on application of holders or trustee (s. 71(10)); trustee may petition if assets are insufficient (s. 71(9)); Know who can approach the Tribunal and why.

How to solve Issue of Debentures: Procedure and Compliance questions

Use the same sequence for any debenture issue question. Match each fact in the problem to a step and apply the rule.

1Identify the company type (public or private), the instrument (non-convertible or convertible) and the mode (public offer or private placement).
2State the approvals: board resolution for the issue, and a special resolution at a general meeting if the debentures are convertible (s. 71(1)). Mention any borrowing-power approval needed under the Act and the articles.
3For private placement, check s. 42: identified persons within the limit, offer-cum-application, no renunciation, payment by banking channel, separate bank account, no public advertisement.
4Check the trustee requirement under s. 71(5): public offer, or offer to more than five hundred members, needs a trustee appointed before the issue. Mention the trust deed and the trustee's duties.
5Apply security and DRR: secured terms as prescribed, and a DRR out of profits available for dividend per s. 71(4) and the Rules.
6List post-issue compliance: allotment within 60 days, return of allotment within 15 days, repayment rules, and interest and redemption per the terms (s. 71(8)).
7State the consequence of default: deemed public offer, penalties, Tribunal remedies. Close with a clear conclusion.

Quickest way: Approvals–Mode–Trustee–Reserve–Filing checklist

When to use it: Use this when a case-based question gives a short fact pattern and asks whether the issue is valid or what the company must do.

Write A-M-T-R-F on the page.
A: convertible? Then special resolution. Voting rights attached? Not allowed.
M: public offer or private placement? Check the 50-person and 60-day tests.
T: public offer or more than 500 members? Trustee before the offer.
R: DRR from profits available for dividend, used only for redemption.
F: return of allotment within 15 days; then give the conclusion with the section.

Common mistakes in Issue of Debentures: Procedure and Compliance

Saying debentures can carry voting rights if members agree.
Students mix debentures with preference shares.
Fix: Quote s. 71(2): no company shall issue debentures carrying any voting rights. No resolution can override it.
Requiring a special resolution for every debenture issue.
The proviso is remembered loosely.
Fix: The special resolution in s. 71(1) applies to debentures with an option to convert into shares. Plain non-convertible issues follow the other applicable approvals.
Appointing the trustee after the offer is made.
Students treat the trustee as a post-issue formality.
Fix: Section 71(5) says the trustee must be appointed before the issue or offer.
Treating the 50-person private placement limit as per offer.
Students overlook the words 'in a financial year'.
Fix: The limit is per financial year and excludes QIBs and ESOP employees. Breach makes the issue a public offer under s. 42(11).
Using the DRR balance for other purposes or creating it from any reserve.
Students think of DRR as a general reserve.
Fix: It is created out of profits available for dividend and used only to redeem debentures (s. 71(4)).
Mixing the allotment and refund timelines.
There are three periods: 60, 15 and 15 days.
Fix: Allot within 60 days of receipt of money; refund within 15 days after that; file the return within 15 days of allotment. Interest of 12% runs from the 60th day if refund is late.

Worked examples

Example 1

Surya Foods Ltd, an unlisted public company, wants to issue convertible debentures to 40 identified investors by private placement. Advise on approvals, offer process and timelines.

Show the solution

Convertible debentures have an option to convert into shares at redemption, so a special resolution at a general meeting is needed under s. 71(1) proviso. A board resolution authorises the issue.
Mode is private placement under s. 42. Forty identified persons is within the limit of fifty, assuming no higher number is prescribed for it. Offer must be made to identified persons through a private placement offer-cum-application, with names and addresses recorded, and no right of renunciation.
Subscription money must come by cheque, demand draft or other banking channel, not cash. It is kept in a separate account in a scheduled bank. The company cannot use it until allotment is made and the return of allotment is filed.
The company may not advertise the issue publicly or use marketing channels to reach the public at large (s. 42(7)).
Allot within sixty days of receiving the application money. If it cannot, it must refund within fifteen days after that, failing which interest at 12% p.a. runs from the sixtieth day.
File the return of allotment with the Registrar within fifteen days of allotment, with the list of allottees. Late filing attracts ₹1,000 per day up to ₹25 lakh. Create a DRR as required by s. 71(4) and the Rules, and no debenture may carry voting rights.

Answer: Surya Foods needs a board resolution and a special resolution for the convertible feature, a compliant s. 42 private placement to the 40 investors, allotment within 60 days, return of allotment within 15 days, DRR as per the Rules, and no voting rights on the debentures.

Example 2

Nilgiri Infra Ltd issued non-convertible debentures to 70 identified persons in a financial year by private placement, none being a QIB or an ESOP employee. It had not appointed a debenture trustee. What is the legal position?

Show the solution

Section 42(2) limits identified persons to fifty, or a higher prescribed number, excluding QIBs and ESOP employees, in a financial year. Seventy exceeds fifty. Assume no higher prescribed limit covers it.
Under s. 42(11), a private placement not made in compliance with s. 42(2) is deemed a public offer. The Companies Act, the Securities Contracts (Regulation) Act, 1956 and the SEBI Act, 1992 then apply.
Section 42 Explanation III also treats an offer or allotment to more than the prescribed number of persons as an offer to the public governed by Part I of the Chapter.
As a public offer, the company needed a prospectus. Section 71(5) also required a debenture trustee to be appointed before the offer. The company did not appoint one, so it breached s. 71(5).
The company is exposed to the consequences of a non-compliant public offer, and the trustee default must be remedied under the Rules and applicable regulations. Debenture-holders can seek redemption through the Tribunal if payment defaults occur (s. 71(10)).

Answer: The issue to 70 persons breaches s. 42(2), so it is deemed a public offer under s. 42(11). Having no debenture trustee also breaches s. 71(5). The company faces the consequences of an unauthorised public offer.

Exam tips

Write the section number with each rule: s. 71 for debentures, s. 42 for private placement. Examiners reward the provision-analysis-conclusion format.
Use the A-M-T-R-F order and answer in numbered points. It shows the procedure clearly and saves time.
For DRR percentages and exemptions, go to the Rules. Do not guess figures. State the principle from s. 71(4) and refer to the Rules for the quantum.
Draft formats matter. Mention the board resolution, special resolution, offer letter, trust deed and Form filing in a practical answer.
Always end with a conclusion: valid, void, or deemed public offer, with the reason.

Practice questions from Raising of Funds from Debt and Procedural Aspects

Issue of Debentures: Procedure and Compliance 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: Procedure and Compliance: frequently asked questions

Does every debenture issue need a special resolution?

No. Section 71(1) proviso requires a special resolution at a general meeting for debentures with an option to convert into shares, wholly or partly. Other issues follow the approvals applicable under the Act and the articles.

When must a debenture trustee be appointed?

Under s. 71(5), before a company issues a prospectus or makes an offer to the public, or to more than five hundred members, for subscription of debentures. The appointment is a pre-condition, so it cannot be done after the offer.

Can NCDs be issued through private placement?

Yes. Both public and private companies can use private placement under s. 42. The offer goes to identified persons within the prescribed limit, through an offer-cum-application, with payment by banking channel and no public advertisement.

What is the purpose of the debenture redemption reserve?

Section 71(4) requires a DRR account out of profits available for payment of dividend. The amount can be used only to redeem debentures, which protects debenture-holders. The Rules set the quantum and who must create it.