CS Executive · Company Law and Practice · Debt Instruments - Concepts
Sunrise Agro Ltd, an unlisted public company, plans to invite subscription for its debentures from the public through a prospectus. Its directors propose to appoint a debenture trustee only after the issue closes, so that the trustee can see the amount raised. Under the Companies Act, 2013, what is the position?
The proposal is not permissible. A company must appoint one or more debenture trustees before it issues a prospectus or makes an offer or invitation to the public, or to more than five hundred members, for subscribing to debentures. Appointment after the issue closes does not comply.
- AThe proposal is permissible, as the trustee may be appointed any time within the first year after allotment
- BThe proposal is not permissible, as one or more debenture trustees must be appointed before the prospectus is issued or the offer is madeCorrect
- CThe proposal is permissible, as a trustee is needed only if the debentures are convertible into shares
- DThe proposal is permissible, as a trustee is needed only when debentures are unsecured
Explanation
Section 71(5) bars a company from issuing a prospectus or making an offer or invitation to the public, or to more than five hundred members, for subscription of debentures unless it has appointed one or more debenture trustees before the issue or offer. Appointment after the issue closes does not satisfy this requirement. The other options invent exceptions that the section does not contain.
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