Debentures and Dematerialization

Mehr Malhotra, Abraham Mathew, Jasmine Pereira, Sneha Pendharkar, Vaishnavi

and Sherilynn Tellis

DEBENTURES

According to Section 2(12) of the Companies Act, 1956 , the term “debenture" includes

debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not. It is a debt instrument for raising loan capital at a lower cost as part of project financing or

other purposes.

It is a written certificate/instrument signed by the company under its common seal acknowledging debt due by it to its holders.

In simple words, through this document:• Company promises to pay a specific amount of money as

stated• At a fixed date in future• Along with periodic interest payment• To compensate holders for using their funds.

TYPES OF DEBENTURES

Security

Secured/Mortgage Debentures

Unsecured/Naked Debentures

Tenure

Redeemable Debentures

Irredeemable/Perpetual Debentures

Registration

Registered Debentures

Bearer Debentures

Convertibility

Convertible Debentures (Fully/ Partly convertible)

Non Convertible Debentures

(NCDs)

i) Security

Secured/Mortgage Debentures• secured against assets of the company .i.e. if

the company is winding up, assets will be sold and debenture holders will be paid back.

• The charge/mortgage may be fixed or a floating charge

• Mortgage deed

Unsecured/Naked Debentures• Not secured against assets of the company.• The creditworthiness and soundness of the

company serves as a security.

Security

Secured/Mortgage Debentures

Unsecured/Naked Debentures

ii) Tenure Redeemable Debentures• Debentures which have to be repaid within a

certain specified period. • Eg: 5% 2 years Rs. 1000 debenture means

redeemable period is 2 years(5%:interest/coupon payment). After redemption, they can be reissued.

Irredeemable/Perpetual Debentures:• These can be paid back at any time during the

life of the company .i.e. there is no specified period for redemption.

• Nonetheless if the company has to wind up, then they have to repay the debenture holders.

Tenure

Redeemable Debentures

Irredeemable/Perpetual

Debentures

iii) Registration Registered Debentures• registered with the company.• It records all details of debenture holdings such as

name, address, particulars of holding etc.• Interest shall be paid only to the registered holder

(treated as a non-negotiable instrument). • They can be transferred by a transfer deed.

Bearer Debentures• These can be transferred by mere delivery. • Company does not hold records for the debenture

holder. • Interest will be paid to the one who displays the

interest coupon attached to the debenture.

Registration

Registered Debentures

Bearer Debentures

iv) ConvertibilityConvertible Debentures (Fully/ Partly

convertible)• Debentures which can be converted to

either equity shares or preference shares by the company or debenture holders at a specified rate after a certain period.

• A company can also issue Partly Convertible Debentures whereby only a part of the amount can be converted to equity/preference shares.

Non Convertible Debentures (NCDs)• These can’t be converted into

equity/preference shares.

Convertibility

Convertible Debentures (Fully/ Partly convertible)

Non Convertible Debentures

(NCDs)

Advantages• It enables a company to raise funds for a specific period.• No dilution of control as debenture holders don’t possess voting rights• Debenture (debt) enables the company to Trade on equity. It can pay

dividend to equity shareholders at a rate higher than overall ROI.• Debenture holders entitled to a fixed rate of interest. Eg: 10% debenture• They enjoy priority over other unsecured creditors with respect to debt

repayment.• Suitable for conservative investors who seek steady ROI with little or no

risk.• Interest on debentures is treated as expense and is tax deductible.• Company can adjust its gearing in accordance to its financial plan.• Debenture holders are regarded as creditors of the company and they

receive preference over equity shareholders and preference share holders.

Disadvantages• They have a fixed maturity; hence provision has to be made for

repayment.• There is a limit to which funds can be raised through debentures.• It is risky if the company fails to pay interest or principal installment on

time, as debenture holders can file petition for winding up the company.• It is not suitable for a company with fluctuating earnings as it may also

lead to fluctuations in payment of dividend payable to equity shareholders.

• With more risk, you get more return. Debentures being secure investments, returns are less.

• Like ordinary shares, debenture holders will not be regarded as owners of the company and have no voting rights.

ISSUE OF DEBENTTURES• Resolution by directors

• Resolution by shareholders

• Consent of SEBI

• Approval of Stock exchange

• Credit Ratings

• Filing of Prospectus

• Registration of Trust Deed

• Issue of Prospectus

• Receipt Of Application

• Allotment of Debentures

• Issue Of Debenture Certificate

• Register and Index Of Debenture holders

What is the difference between bonds, debentures and shares?

Dematerialisation is the process by which an investor can get physical certificates converted into electronic balances.

In finance and financial law, dematerialization refers to the substitution of paper-form securities by book-entry securities.

The major impacts on the market :-• Volatility• Liquidity• Transaction cost

Institutions involved

Depositories

• National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) are depositories.• Depositories hold various securities like shares in electronic form.• A DP (Depository Participant) is like an agent of these depositories.• Investors open their account with depositories via depository participants. • DP tells the depository about which shares are to be credited and debited from the different accounts. Clearance Houses

• Their job was made easier and reduced costs and manpower requirement by making all the transactions electronic.• The CCIL – Clearing Corporation of India Limited.

PROCEDURE FOR DEMATERIALISATION OF SHARES OF COMPANY

• The company should amend its Articles by passing a special resolution at general meeting to insert the articles relating to dematerialization of shares.

• The company should sign agreements with the Depositories, NSDL and CDSL after getting it approved by the board of Directors in Board meeting. SEBI has stipulated that if a company wishes to provide demat facility to its investors it must sign agreements with both the depositories

• In order to dematerialize its shares, a company must have electronic connectivity with the depositories. Electronic connectivity can be established either in-house by investing in computer hardware, software and other equipment or through a Registrar which has got the required infrastructure. In case a company opts foran outside Registrar, the agreement mentioned above will be a tri-partite agreement.

• Once the company is admitted in the depository system, an ISIN (International Securities Identification Number) is allotted by the depository. This number is unique for each security of the company that is admitted in the depository.

• After establishment of electronic connectivity, Depositories inform the name and ISIN of the company, which has joined the depository System, to the Participant.

• The company should inform the Stock Exchanges, where its shares are listed that the company's shares are eligible for dematerialization. The shareholders should also be informed that the company's shares can be held in dematerialized form. This can also be done by issuing an advertisement in newspapers or by way of a mention in

the Annual Report of the Company.

Dematerialization Process for Investors

• An investor having securities in physical form must get them dematerialized, if he intends to sell them.

• This requires the investor to fill a Demat Request Form (DRF) which is available with every DP ( depository participant) and submit the same along with the physical certificates.

• Every security has an ISIN (International Securities Identification Number). If there is more than one security than the equal number of DRFs has to be filled in.

The whole process goes on in the following manner:

Benefits of a Demat Account• A safe and convenient way of holding securities (equity and debt

instruments both).• Less expensive. Transactions involving physical securities are costlier. • Securities can be transferred at an instruction immediately.• Increased liquidity, as securities can be sold at any time during the trading

hours (between 9:55 AM to 3:30 PM on all working days), and payment can be received in a very short period of time.

• No stamp duty charges.• Risks like forgery, thefts, bad delivery, delays in transfer etc, associated with physical certificates, are eliminated.• Pledging of securities in a short period of time.

• Reduced paper work and transaction cost.• Odd-lot shares can also be traded (can be even 1 share).• Nomination facility available.• Any change in address or bank account details can be electronically

intimated to all companies in which investor holds any securities, without having to inform each of them separately.

• Securities are transferred by the DP itself, so no need to correspond with the companies.

• Shares arising out of bonus, split, consolidation, merger etc. are automatically credited into the demat

account of the investor.• Shares allotted in public issues are directly credited into demat account of the applicants in quick time.

Thank You