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CS Executive · Corporate Accounting and Financial Management · Accounting for Debentures

A company issued debentures with a term giving the holders an option to convert them into equity shares. Under the Companies Act, 2013, the pre-emptive offer-to-existing-shareholders requirement for further issue of shares does not apply to the resulting increase in capital only if the terms of issue containing the option were:

The exemption from the rights-offer requirement applies only if the conversion option's terms were approved by a special resolution in general meeting before the debentures were issued. Approval later, by ordinary resolution, or by the Board alone does not meet the condition in the Act.

  1. AApproved by a special resolution in general meeting before the debentures were issuedCorrect
  2. BApproved by an ordinary resolution after the debentures were allotted
  3. CApproved by the Board of Directors at the time of conversion
  4. DApproved by the debenture trustee before the date of conversion

Explanation

Section 62(3) exempts capital increase from exercise of a conversion option attached to debentures, provided the terms containing the option were approved before issue by a special resolution passed in general meeting. An after-the-event or board-only approval does not satisfy the proviso.

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