Debentures & Other Sources of Finance

 

Borrowings, Loans, Debentures and Investments

 

Borrowing Powers of a Company

a) Introduction: A company needs money to finance its activities. A part of this requirement is met by issue of shares; for the rest the company has to resort to public borrowing. Borrowing is incidental to trading. The exigencies of commerce render such a power necessary. A trading company has implied power to borrow unless prohibited by its memorandum or articles.

A non-trading company requires express powers to borrow. This power is taken in its memorandum or articles. Where the memorandum authorises the company to borrow, the articles provide as to how and by whom these powers will be exercised. A public company, having a share capital, cannot exercise borrowing power unless certificate to commence business is obtained by it.

b) Exercise of Borrowing Power and Limitations: The power to borrow is exercised by the directors. Directors act as agents and this power is subject to two limitations:

i. Statutory Limits: No borrowing is permissible beyond the aggregate of the paid up capital of the company and its free reserves (i.e. reserves not set apart for any specific purpose) unless prior sanction is obtained in general meeting.

ii. As contained in the memorandum or articles.

 

Meaning of Loan

Loan includes debentures or any deposit of money made by one company with another company, not being a banking company.

Debenture

a) Definition: According to the Act, “ ‘debenture’ includes debenture, stock, bonds, and any other securities of a company, whether constituting a charge on the assets of the company or not.

 

b) Characteristic Features of a Debenture Are:

i. It is issued by the company and is in the form of a certificate of indebtedness.

ii. It is of a series but can be a single debenture.

iii. It usually specifies the date of redemption. It also provides for the repayment of principal and interest at specified date(s).

iv. It generally creates a charge.

v. It is a movable property.

vi. A debenture holder has no right of voting in company’s meetings.

 

c) Kinds of debentures: Debentures may be of the following kinds:

i. Bearer or unregistered

ii. Registered

iii. Secured

iv. Unsecured or naked

v. Redeemable

vi. Irredeemable or perpetual.

vii. Convertible or non-convertible. Convertible debentures can be fully or partly convertible.

Investments

a) Meaning: The word ‘investments’ in its natural connotation, would include any property or right in which money or capital is invested. The word ‘investments’ in a limited sense would mean the investing of money in shares, stock, debentures or other securities.

 

b) Rules for Investments: Some of the rules for investments are:

i. Investments are to be held in company’s own name, except an investment company.

ii. Qualification shares are to be in respect of nominee director or nominee holders.

iii. Holding shares in a subsidiary company may be in the name of nominee.

iv. Certificates or letters of allotment are to be in the custody of the company.

v. Register of investments not held in company’s own name is to be maintained.

Inter Corporate Loans and Investments

a) Ceiling on Loans, Guarantees, Investments, etc.: No company shall, directly or indirectly:

i. Make any loan to any other body corporate.

ii. Give any guarantee, or provide security, in connection with a loan made by any other person to, or to any other person, by any body corporate.

iii. Acquire by way of subscription, purchase or otherwise the securities of any body corporate, exceeding 60% of its paid up share capital and free reserves or 100% of its free reserves, whichever is more.In case the limit is exceeded special resolution is required.

 

b) Guarantee by the Board: The Board may give guarantee, without being previously authorised by a special resolution, if:

i. A resolution is passed in the meeting of the Board authorising to give guarantee.

ii. There exist exceptional circumstances which prevent the company from obtaining previous authorisation by a special resolution passed in a general meeting for giving a guarantee.

iii. The resolution of the board under (i) is confirmed within 12 months, in a general meeting of the company or the annual general meeting held immediately after passing of the board resolution, whichever is earlier.

 

c) Notice: Of such resolution shall indicate clearly.

i. The specific limits.

ii. The particulars of the body corporate where loan, guarantee or security to be given.

iii. The purpose of the investment, loan, security or guarantee.

iv. Special sources of funding and such other details.

 

d) Unanimous Board Resolution: No loan or investment shall be made or security given by the company unless the resolution sanctioning it is passed at the meeting of the board with the consent of all the directors present at the meeting and the prior approval of the public financial institution where any term loan is subsisting, is obtained.

e) Loan at Bank Rate: No loan to any body corporate shall be made at a rate of interest lower than the prevailing bank rate.

f) Not Applicable to a Company in Default of Public Deposits: No company which has  defaulted in complying with Section 58A (Public deposits) shall directly or indirectly:

i. Make any loan to any body corporate.

ii. Give any guarantee, or provide a loan made by any person to, or to any other person by any body corporate.

iii. Acquire, by way of subscription, purchase or otherwise the securities of any other body corporate till such default is subsisting.

 

g) Keeping of a Register: Every company shall keep a register showing the following particulars in respect of every investment or loan made, guarantee given or security provided by it in relation to any body corporate namely:

i. The name of the body corporate.

ii. The amount, terms and purpose of the investment or loan or security or guarantee;

iii. The date on which the investment or loan has been made.

iv. The date on which the guarantee has been given or security has been provided in connection with the loan.

 

h) Other Rules About Register:

i. Entries to be made chronologically within seven days of transaction.

ii. Register shall be kept at registered office and open for inspection as the register of members.

iii. Extracts or copies can be taken.

 

i) Guidelines: Central government may prescribe guidelines for the purpose of this section.

 

j) Not Applicable: Nothing contained in this section (372A) shall apply:

i. To any loan made, any guarantee given or any security provided for any investment made by:

a. A banking company, or an insurance company, or a housing finance companyin the ordinary course of its business, or a company established with the object of financing industrial enterprise, or of providing infrastructural facilities.

b. A company whose principal business is the acquisition of shares, stock, debentures or other securities.

c. A private company, unless it is a subsidiary of a public company.

ii. To any investments made in shares allotted in pursuance of Section 81 (1)(A) (Rights issue).

iii. To any loan made by a holding company to its wholly owned subsidiary.

iv. To any guarantee given or any security provided by a holding company to its wholly owned subsidiary.

v. To acquisition by a holding company by way of subscription, purchase or otherwise, the securities of its wholly owned subsidiary.

 

k) Penalties:

i. If default is made in complying with the provisions of this section, other than the provision relating to keeping of a register, the company and every officer of the company who is in default shall be punishable with imprisonment which may extend to two years or with fine which may extend to Rs. 50,000.

ii. If default is made in complying with the provisions relating to keeping of a register, the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 5,000 and also with a further fine which may extend to Rs. 500 for every day after the first day during which the default continues.

iii. No punishment of imprisonment, if loan is repaid in full.

iv. Imprisonment is proportionately reduced, when loan is paid in part.

 

 

 

 

 

 

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