Debentures vs Deposits: An Overview
Understanding the Regulatory Framework: The Companies
(Acceptance of Deposits) Rules, 2014, define "deposit" under Rule
2(1)(c) as any receipt of money by way of deposit, loan, or in any other form
by a company. However, certain receipts are excluded from this
definition, particularly under specific circumstances related to debentures and
bonds.
Key Exemptions:
- Secured Debentures: Debentures that are secured by a first charge
or a pari passu charge on the company’s tangible assets (excluding
intangible assets) and do not exceed the market value of those assets (as assessed
by a registered valuer) are not considered deposits.
- Compulsory Conversion: Debentures that are compulsorily convertible
into shares within ten years are excluded from the definition of deposits.
- Listed Non-Convertible Debentures (NCDs):
Non-convertible debentures (NCDs) that are listed on a recognized stock
exchange are also excluded from the purview of deposits.
Notably, if debentures initially issued as
unsecured later become secured through a mortgage and a trust deed is executed
and registered with the Registrar of Companies (ROC), they are exempt from
being classified as deposits.
Types of Debentures and Deposit Status:
Debentures - Deposit Status
| Type of Debenture | Deposit or Not? | Remarks |
|---|---|---|
| Convertible, Unlisted, Unsecured | No | Exempt if convertible within 10 years |
| Convertible, Listed, Unsecured | No | Exempt if convertible within 10 years |
| Convertible, Listed, Secured | No | Exempt due to both convertibility within 10 years and secured by first charge |
| Non-Convertible, Unlisted, Unsecured | Yes | Must be listed to remain exempt |
| Non-Convertible, Listed, Unsecured | No | Exempt by virtue of listing |
| Non-Convertible, Unlisted, Secured | No | Exempt if secured |
Important Compliance Notes:
- Debenture Trustees: Companies must appoint debenture trustees,
execute a trust deed, and file the necessary charge documents when issuing
secured debentures.
- Tenure Limitation: According to Rule 18(1)(a) of the Companies
(Share Capital & Debentures) Rules, 2014, secured debentures must be
redeemable within ten years from the date of issue.
Conclusion: Proper classification and compliance regarding
debentures are crucial for companies to ensure that the instruments do not fall
under the regulatory regime of deposits. Companies should pay careful attention
to the listing requirements, security creation, and conversion timelines to
avoid non-compliance under the Companies Act, 2013.
Disclaimer: The content of this blog is for informational and educational purposes only and does not constitute legal advice or opinion
