SEBI Regulations on Issue of Debentures

1. Credit rating. It is compulsory in the case of all issues of debenture. If a company has obtained more than one rating, all such ratings must be disclosed. If the issue exceeds ` 200 crores, rating must be obtained from two agencies.

2. Put and call options. If FCDs are to be converted before 18 months, they are considered as quasi- equity. If conversion is after 18 months but before 36 months, it is treated as deferred equity. In the case of deferred equity, the conversion will be optional in the hands of debenture holder. In the case of conversion beyond 36 months, it must be made optional with both put and call options.

3. Security for debentures. If secure debentures are issued, a company must obtain certificate from the bankers that the assets are free from encumbrances or no objection certificate from the bank/financial institution for creating a second charge or pari passu charge as per terms of offer of debentures. Normally security must be created within 6 months. If security is not created, within 12 months, a penal interest at 2% is payable to debenture holders. If the security is not created, within 18 months, a meeting of the debenture holders must be called with 21 days notice to explain the reasons for delay in creating the security and the expected date by which security will be created.

Trustees to debentures will supervise the creation of security. If security is not created, the debentures will be unsecured. As stated earlier in such a situation, the debentures will be treated as fixed deposits which makes it incumbent to satisfy the requirements of Sec. 73 & 74.

4. Debenture trustees. If the maturity of debentures is more than 18 months, the company has to appoint debenture trustees to safeguard the interests of the debenture holders. The trustees should have requisite powers for protecting the interests of the debenture holders including their rights to nominate a director on the board in consultation with institutional debenture holders.

The debenture trustees must also ensure the compliance of the following:

a. Lead financial institutions / investment institutions should monitor the progress in respect of debentures raised for project finance/modernization/ expansion/ diversification/ normal capital expenditure.

b. The lead bank must monitor debentures raised for working capital funds.

c. Obtain a certificate from the company’s auditors during the implementation period of the projects and in the case of debentures for working capital at the end of each accounting year.

d. Debenture issues by companies belonging to the groups for financing replenishing of funds or acquiring shares in other companies should not be permitted.

e. The trustees must supervise the implementation of the conditions regarding creation of security for the debentures and debenture redemption reserve.