A “right debenture” is a form of convertible debenture, granting the holder additional rights beyond just receiving interest payments. It allows the holder to convert the debenture into a certain number of shares of the issuing company at a predetermined price within a specific timeframe, essentially giving them the option to become part-owners of the company.
Benefits for Companies
Companies use debentures to raise capital for expansion, working capital requirements, or debt refinancing. Right debentures can be particularly attractive for companies seeking to raise capital without immediate dilution of ownership, as the conversion feature is only triggered if the holder opts to exercise it within the specified period.
SEBI Regulations for Debentures for Working Capital
The Securities and Exchange Board of India (SEBI) regulates debentures for working capital through the Debenture Trustees Regulations, 1993. These regulations cover eligibility, registration, and monitoring of debenture trustees. Additionally, SEBI issues circulars outlining further requirements and obligations.
Key SEBI Guidelines
- A company offering convertible or non-convertible debt instruments through an offer document must comply with SEBI provisions in addition to other applicable guidelines.
- No public or rights issue of debt instruments (including convertible instruments) can be made without obtaining and disclosing a credit rating from a credit rating agency.
- For public or rights issues of debt securities worth Rs. 100 crores or more, two ratings from different credit rating agencies are required. All obtained credit ratings, including unaccepted ones, must be disclosed.
- The offer document must include all credit ratings obtained during the preceding three years for any listed security of the issuer.
Debenture Trustee Responsibilities
Debenture trustees play a critical role in ensuring compliance with debenture terms. Their key duties include:
- Supervising the implementation of conditions regarding the creation of security for debentures and the debenture redemption reserve.
- Ensuring disclosure of material events.
- Obtaining certificates confirming the proper use of funds for working capital.
Certificates Requirement
For debentures issued for working capital, the debenture trustee must secure a certificate from the company’s auditors at the end of each accounting year, confirming how the funds were utilized.
Communication with Debenture Holders
Debenture trustees are required to communicate with debenture holders semi-annually. These communications should provide updates on compliance with issue terms, any defaults, and actions taken.
Creation of Charge
Companies must file particulars for registering charges created or modified to secure debentures using MCA Form CHG-9. This form is also used to correct omissions or errors in previous filings.
Required Attachments for Filing CHG-9:
- A certified true copy of the resolution authorizing the issuance of the debenture series (mandatory for the creation of a charge).
- The instrument detailing the charge created or modified (mandatory in all cases).
Monitoring
The lead bank for the company should monitor the use of funds raised through debentures for working capital. As part of this process, a certificate must be obtained at the end of each accounting year to confirm the proper utilization of funds.
By adhering to these regulations and best practices, companies can effectively utilize right debentures as a strategic tool for raising capital while maintaining transparency and compliance with regulatory frameworks.
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