Chapter IV - Share Capital and Debentures
Section 71
Section 71: issue of debentures
Section 71 sets the core rules for issuing debentures: convertibility, a ban on voting rights, secured debenture conditions, the debenture redemption reserve, debenture trustees and remedies for holders.
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This article is for general information. Refer to the Companies Act, 2013 official text for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) A company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption: Provided that the issue of debentures with an option to convert such debentures into shares, wholly or partly, shall be approved by a special resolution passed at a general meeting.
(2) No company shall issue any debentures carrying any voting rights.
(3) Secured debentures may be issued by a company subject to such terms and conditions as may be prescribed.
(4) Where debentures are issued by a company under this section, the company shall create a debenture redemption reserve account out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilised by the company except for the redemption of debentures.
(5) No company shall issue a prospectus or make an offer or invitation to the public or to its members exceeding five hundred for the subscription of its debentures, unless the company has, before such issue or offer, appointed one or more debenture trustees and the conditions governing the appointment of such trustees shall be such as may be prescribed.
(6) A debenture trustee shall take steps to protect the interests of the debenture-holders and redress their grievances in accordance with such rules as may be prescribed.
(7) Any provision contained in a trust deed for securing the issue of debentures, or in any contract with the debenture-holders secured by a trust deed, shall be void in so far as it would have the effect of exempting a trustee thereof from, or indemnifying him against, any liability for breach of trust, where he fails to show the degree of care and due diligence required of him as a trustee, having regard to the provisions of the trust deed conferring on him any power, authority or discretion: Provided that the liability of the debenture trustee shall be subject to such exemptions as may be agreed upon by a majority of debenture-holders holding not less than three-fourths in value of the total debentures at a meeting held for the purpose.
(8) A company shall pay interest and redeem the debentures in accordance with the terms and conditions of their issue.
(9) Where at any time the debenture trustee comes to a conclusion that the assets of the company are insufficient or are likely to become insufficient to discharge the principal amount as and when it becomes due, the debenture trustee may file a petition before the Tribunal and the Tribunal may, after hearing the company and any other person interested in the matter, by order, impose such restrictions on the incurring of any further liabilities by the company as the Tribunal may consider necessary in the interests of the debenture-holders.
(10) Where a company fails to redeem the debentures on the date of their maturity or fails to pay interest on the debentures when it is due, the Tribunal may, on the application of any or all of the debenture-holders, or debenture trustee and, after hearing the parties concerned, direct, by order, the company to redeem the debentures forthwith on payment of principal and interest due thereon.
(12) A contract with the company to take up and pay for any debentures of the company may be enforced by a decree for specific performance.
(13) The Central Government may prescribe the procedure, for securing the issue of debentures, the form of debenture trust deed, the procedure for the debenture-holders to inspect the trust deed and to obtain copies thereof, quantum of debenture redemption reserve required to be created and such other matters.
Introduction
Most operating detail, including the conditions for secured debentures and the quantum of the debenture redemption reserve, is left to rules under section 71(3), (6) and (13). Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014 is the starting point; check its current amended text.
Key takeaways
Convertible issues
Debentures convertible into shares need a special resolution passed at a general meeting.
No voting rights
A company cannot issue debentures carrying voting rights.
Trustee and reserve
A debenture trustee is required for a public offer or an offer to more than five hundred members; a debenture redemption reserve must be created as the section and rules require.
Structure the issue
A company may issue debentures with an option to convert them into shares, wholly or partly, at redemption, but the issue must be approved by a special resolution at a general meeting (section 71(1)). No debentures may carry voting rights (sub-section (2)). Secured debentures may be issued subject to prescribed terms and conditions (sub-section (3)).
Debenture redemption reserve
Where debentures are issued, section 71(4) requires a debenture redemption reserve account created out of profits available for dividend, used only for redeeming debentures. The quantum and any class-based treatment are prescribed under sub-section (13); confirm the current rule before structuring an issue.
Debenture trustees
A prospectus, or an offer or invitation to the public or to more than five hundred members for debentures, requires prior appointment of one or more debenture trustees on prescribed conditions (sub-section (5)). The trustee must protect holders’ interests and redress grievances under the rules (sub-section (6)). A trust-deed clause exempting or indemnifying a trustee for breach of trust is void where the trustee fails to show the required care and diligence, subject to exemptions agreed by holders of at least three-fourths in value at a meeting (sub-section (7)).
Holders’ remedies
The company must pay interest and redeem as per the terms of issue (sub-section (8)). If the trustee concludes that the assets are or are likely to become insufficient to discharge principal, it may petition the Tribunal, which may restrict further liabilities (sub-section (9)). On failure to redeem at maturity or pay interest when due, the Tribunal may, on application of holders or the trustee, order immediate redemption with interest (sub-section (10)). A contract to take up and pay for debentures can be enforced by specific performance (sub-section (12)).
Amendments and commencement
Section 71 came into force on 1 April 2014 under S.O. 902(E), except sub-sections (9) to (11), which came into force on 1 June 2016 under S.O. 1934(E). Section 15 of the Companies (Amendment) Act, 2020 omitted sub-section (11), which had punished officers for defaulting on a Tribunal order under the section, effective 21 December 2020 (S.O. 4646(E)).
Practical preparation
Decide convertible or non-convertible and secured or unsecured; pass a special resolution for a convertible issue; check rule 18 conditions for secured debentures; appoint a debenture trustee where sub-section (5) applies; create the debenture redemption reserve as currently prescribed; execute the trust deed; register any charge under section 77; track interest and redemption dates.
Practical checklist
Do
- Pass the special resolution before issuing convertible debentures.
- Register the security for secured debentures under section 77.
Avoid
- Do not attach voting rights to debentures.
- Do not use the debenture redemption reserve for any purpose other than redemption.
Illustrative example
Hypothetical: secured private placement
A company plans secured non-convertible debentures to a small group of investors.
Terms
Check rule 18 conditions for secured debentures and the current reserve requirement.
Trustee
Assess whether sub-section (5) applies; appoint a trustee if required or chosen.
Charge
Register the charge with the Registrar within the section 77 period.
Outcome
- The issue complies with section 71 and the charge is enforceable against a liquidator and other creditors.
Glossary
- Debenture
- An instrument evidencing a debt of the company, as defined in section 2(30).
- Debenture trustee
- A trustee appointed to protect the interests of debenture-holders.
- Debenture redemption reserve
- A reserve out of distributable profits used only to redeem debentures.
Frequently asked questions
Can debentures carry voting rights?
No. Section 71(2) prohibits issuing debentures carrying any voting rights.
When is a debenture trustee mandatory?
Before issuing a prospectus or making an offer or invitation for debentures to the public or to more than five hundred members.
What if the company does not pay interest?
Holders or the trustee may apply to the Tribunal, which may order redemption forthwith with principal and interest due.
Need help applying this provision to your situation?
Contact BizeneedLast updated 11 October 2026