Issue of Debentures by a Company
The issue of debentures lets a company borrow from investors without giving up ownership. We structure the instrument under Section 71 and the private placement rules, draft the offer papers and file PAS-3 within 15 days of allotment.
What it is
A debenture is a written acknowledgement of a debt by a company. The investor lends money, the company pays interest at an agreed rate and repays the principal on maturity. Unlike shareholders, debenture holders do not own the company. Section 71(2) bars debentures from carrying voting rights.
Here is where the law sits: Section 71 of the Companies Act, 2013 and Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014. Unlisted companies usually issue through private placement under Section 42, with an offer letter in Form PAS-4 and a return of allotment in Form PAS-3 on the MCA V3 portal.
Who it applies to
Companies that want growth capital without dilution
Promoters who want to keep their shareholding intact and are comfortable paying interest.
Startups raising bridge money
A Gurugram software startup waiting six months for its seed round can issue compulsorily convertible debentures now. They turn into shares once the round fixes the price.
NBFCs and asset-backed businesses
Companies with strong assets can offer security and borrow at a lower rate than an unsecured loan would cost.
Why it matters
No loss of control
Holders have no vote. Your board and your shareholding stay exactly as they are.
Terms you can shape
Interest, tenure, security and conversion are fixed in the offer and trust deed, so the instrument fits your cash flows.
Done wrong, it becomes a deposit
A badly structured issue of debentures can turn into a deposit. Unsecured debentures outside the exemptions in the Companies (Acceptance of Deposits) Rules, 2014 are treated as deposits, with a much heavier rulebook.
Documents required
From the company
- MoA and AoA, checked for borrowing powers
- Latest audited financial statements
- Details of the assets offered as security
- Separate bank account for subscription money
For the offer
- Board resolution and special resolution
- Offer letter in PAS-4 and record of offers in PAS-5
- Registered valuer’s report, where the price needs one (see our share valuation report service)
- Debenture trust deed in Form SH-12, where a trustee is needed
From each investor
- Application form and PAN
- Payment from the investor’s own bank account
- Demat account details, where allotment is in demat form
Types of debentures at a glance
| Type | What it means | Key rule |
|---|---|---|
| Secured NCD | Repaid in cash, backed by a charge on assets | Charge created in favour of the trustee; outside the deposit rules if secured by a first or pari passu charge |
| Unsecured NCD | Repaid in cash, no security | Treated as a deposit by an unlisted company unless an exemption applies |
| Compulsorily convertible (CCD) | Must convert into shares | Outside the deposit rules if convertible within ten years |
| Optionally convertible (OCD) | Investor may convert or take cash | Special resolution under Section 71(1) for the conversion option |
Say a Faridabad manufacturer takes ₹2 crore from friends of the promoters on plain unsecured NCDs. It may find it has accepted deposits, and the full deposit rulebook then applies. We test the structure against those rules before anything is offered.
How it works
Fix the instrument and the investors
We agree the type, amount, rate, tenure and security, and list the identified investors. Private placement is limited to 200 persons in a financial year, excluding qualified institutional buyers and employees under ESOPs.
Pass the resolutions
The board approves the issue and calls a general meeting. Shareholders pass a special resolution for the private placement, and for any conversion option under Section 71(1).
Circulate the offer and collect money
We prepare PAS-4 and record each offer in PAS-5. Money goes into a separate bank account, and it must come from each investor’s own account. Cash is not allowed.
Allot and file PAS-3
Allotment must happen within 60 days of receiving the money. We then file the return of allotment in PAS-3 within 15 days. Our PAS-3 filing work covers this step.
Create the security and issue certificates
For secured debentures, we create the charge in favour of the trustee and register it through our charge creation and satisfaction work. Certificates go out within six months of allotment, or the debentures are credited in demat form.
Timelines
60 days to allot, 15 to report
Allot within 60 days of receiving the application money, or refund within the next 15 days. After that, interest runs at 12% a year from the 60th day. PAS-3 follows within 15 days of allotment.
Trustee and trust deed
Where a debenture trustee is needed, appoint one before the offer letter goes out. Rule 18 requires the trust deed to be executed within 60 days of allotment.
Tenure of up to ten years
Secured debentures can be redeemed up to ten years from issue. Infrastructure companies and certain financial entities can go up to 30 years. Certificates follow within six months of allotment under Section 56(4)(d).
What happens if the rules are missed
Private placement penalties
A late or defective PAS-3 can cost ₹1,000 a day, up to ₹25 lakh, under Section 42(9). A defective placement can attract a penalty up to the amount raised or ₹2 crore, whichever is lower, under Section 42(10).
Money not refunded on time
If the company neither allots within 60 days nor refunds within the next 15, it owes 12% a year on the money from the 60th day.
Default on redemption
The NCLT can order immediate redemption under Section 71(10). A default of one year or more also disqualifies the directors for five years under Section 164(2)(b).
Frequently asked questions
Can a private limited company issue debentures?
Yes. A private company can issue debentures under Section 71, almost always by private placement under Section 42. That means a special resolution, an offer letter in PAS-4 to identified persons, no more than 200 investors in a financial year, and a return of allotment in PAS-3 within 15 days. The real question is structure: secured, unsecured or convertible.
Do debentures carry voting rights?
No. Section 71(2) says no company shall issue debentures carrying voting rights. Holders are lenders, not owners, so they cannot vote at general meetings. If an investor wants a say, a convertible instrument is the usual route, because the investor becomes a shareholder only after conversion.
Are unsecured debentures treated as deposits?
For an unlisted company, often yes. The Deposits Rules exclude debentures secured by a first or pari passu charge on assets other than intangibles, debentures compulsorily convertible into shares within ten years, and unsecured NCDs listed on a recognised stock exchange. Plain unsecured NCDs of an unlisted company fit none of these. A DPIIT-recognised startup has one more route: a convertible note of ₹25 lakh or more. We check the fit before the offer.
When is a debenture trustee mandatory?
Section 71(5) requires a trustee when debentures are offered to the public or to more than 500 persons. Rule 18 says the trustee must be appointed before the offer letter is issued, with the trust deed executed within 60 days of allotment. Below that threshold, a trustee is not compulsory, but many lenders ask for one anyway.
Which forms do I file for a debenture issue?
Typically three. MGT-14 for the special resolution within 30 days, PAS-3 for the allotment within 15 days in a private placement, and a charge form where the debentures are secured. A company that is not a small company must also issue securities in demat form, so the ISIN has to be ready first. We prepare the papers in order so no form waits on another.
How long can debentures run?
Secured debentures can be redeemed up to ten years from the date of issue under Rule 18. Infrastructure companies and certain notified financial entities can go up to 30 years. Security must be sufficient to cover the principal and interest. Convertible instruments follow their own terms, but compulsorily convertible ones should convert within ten years to stay outside the deposit rules.
Does a debenture issue need a redemption reserve?
For an unlisted company other than a bank or an all-India financial institution, Rule 18 asks for a debenture redemption reserve of 10% of the outstanding debentures. Listed companies, banks and certain NBFCs have exemptions. Whether the reserve applies to you depends on your category, and we confirm that when we draft the terms.
What happens if the company cannot redeem on time?
Debenture holders can approach the NCLT, which may order the company to redeem immediately with interest under Section 71(10). A failure to redeem for one year or more also makes the directors ineligible for appointment for five years under Section 164(2)(b). In practice, talk to holders early. A rollover agreed before the due date is far cheaper. We help document any revised terms properly.
What it costs
Our fee plus the government fee that applies to your case, quoted before you commit. Tell us the situation and we will price it exactly.
Government costs for an issue of debentures depend on the forms. PAS-3 and MGT-14 carry a normal ROC fee of ₹200 to ₹600 by authorised capital, multiplied 2× to 12× if filed late. Valuation, trustee and depository charges are paid to those service providers.
Ready to begin?
Tell us how much you want to raise and from whom, and we will propose a debenture structure that keeps you clear of the deposit rules.