Dr.

RAM MANOHAR LOHIYA NATIONAL

LAW UNIVERSITY, LUCKNOW

Corporate Law

Project on

“Debentures as an alternative source if Capital”

2022-2023

Submitted to Submitted by

Dr. Visalakshi Vegesna Siddhartha Rao

Associate Professor Roll No. 200101139

RMLNLU 6th Semester
ACKNOWLEDGEMENT

First and foremost, I would like to thank Dr. Visalakshi Vegesna ,

faculty of Corporate law, for creating opportunities to undertake such
a valuable project. She helped me in preparing the project through her
aura and by granting her precious time for consultation, discussion
and giving suggestions over this project. She had also helped me in
improving the perception regarding the study of topic in its vast
resources and in broader way. She had cleared all doubts and
uncertainty towards this project. Therefore, I want to thank her, for all
her efforts and cooperation which she conferred to me.

Lastly, I want to thank my seniors and friends who helped me

throughout the research of this project.

Siddhartha Rao

Semester- 6th
Section-B

Roll No-200101139

Introduction

In the corporate world, raising capital is an essential task for

businesses to fund their growth, expansion, or even day-to-day
operations. There are several ways to raise capital, including equity,
debt, and hybrid instruments. Among these, debentures are an
increasingly popular alternative source of capital for companies.
Debentures are a type of debt instrument that provides a fixed rate of
return to the investors and are backed by the creditworthiness of the
issuing company.

In this project, we will explore debentures as an alternative source of

capital, their features, advantages, and disadvantages. We will also
discuss the regulatory framework for debentures under Indian
company law, including the types of debentures, issuance process, and
regulations for the protection of investors.

Debentures are a popular financial instrument used by companies to

raise funds from the market. It is a debt instrument that offers fixed
returns to investors in the form of interest payments. In India,
debentures are governed by the Companies Act, 2013, and the
Securities and Exchange Board of India (SEBI) regulations.
Debentures are an alternative source of capital for companies, which
can be used to finance their long-term projects or meet their working
capital requirements.

Objectives:

The primary objective of this project is to understand the concept of

debentures and their role as an alternative source of capital for
companies in India. The project aims to provide a comprehensive
analysis of the legal and regulatory framework governing debentures
in India, including the Companies Act and SEBI regulations. The
project also aims to examine the advantages and disadvantages of
using debentures as a source of capital for companies.

To examine the legal framework for the issuance of debentures under

Indian company law.

To analyze the types of debentures that can be issued under Indian

company law.

To evaluate the benefits of debentures as an alternative source of

capital for companies.

To identify the risks associated with investing in debentures.

To suggest ways to mitigate the risks associated with investing in

debentures.
Methodology:

The project will be conducted using a combination of primary and

secondary research. Primary research will involve conducting
interviews with experts in the field of corporate finance and law to
gain insights into the use of debentures as a source of capital in India.
Secondary research will involve reviewing literature on the subject,
including academic articles, reports, and government publications.

The project will also Involve a comparative analysis of debentures

with other sources of capital, such as equity and bank loans. The
analysis will be based on parameters such as cost of capital, risk,
flexibility, and control.

Abstract:

Debentures are a form of long-term debt financing that allows

companies to raise capital from the public. Debentures are a vital
alternative source of capital for companies, especially in times when
traditional sources of funding are scarce or difficult to obtain. The
objective of this research project is to evaluate the significance of
debentures as an alternative source of capital under Indian Company
Law.
This research project will begin with an analysis of the Indian
Company Law provisions relating to debentures. It will examine the
legal framework and regulatory guidelines that govern the issuance of
debentures in India. The project will also evaluate the benefits and
drawbacks of raising capital through debentures, as compared to other
forms of financing, such as equity or bank loans.

The project will includeincludee a detailed study of the Indian

debenture market, including the types of debentures available, the
market trends, and the investors’ preferences. The research will also
examine the factors that influence the demand for debentures and the
risks involved in investing in debentures.

Further, the research will explore the significance of debentures as an

alternative source of capital for small and medium-sized companies in
India. It will investigate how debentures can be an effective tool for
SMEs to raise funds for business expansion and growth.

The research project will utilize a mixed-method approach, including

both quantitative and qualitative research methods. The project’s data
will be collected through primary sources such as interviews, surveys,
and case studies, as well as secondary sources like academic
literature, reports, and statistical data.
The findings of this research project will be useful for policymakers,
regulators, and business owners who seek to understand the benefits
and drawbacks of raising capital through debentures. The project’s
recommendations will help companies make informed decisions about
the most appropriate financing option for their business needs.

Analysis of Debentures as an alternative source of Capital

In Indian Company Law, debentures are considered as an alternative

source of capital for companies. A debenture is a type of bond that a
company issues to raise funds from investors. The debenture is a loan
from the investor to the company, with the promise of fixed interest
payments and the repayment of the principal amount at the end of the
term. The interest rate on debentures is usually higher than that of
traditional bank loans, which makes them an attractive option for
companies looking to raise funds.

Debentures are an important source of capital for companies because

they provide an alternative to traditional bank loans or equity
financing. In many cases, companies may not be able to secure a bank
loan due to their credit history, lack of collateral, or other factors.
Equity financing, on the other hand, requires the company to sell a
portion of its ownership to investors in exchange for funds, which can
dilute the ownership of existing shareholders.

Debentures, on the other hand, do not dilute the ownership of existing

shareholders. Instead, they provide an option for companies to raise
funds without giving up ownership or control of the company. This
can be particularly important for small and medium-sized enterprises
(SMEs) that are looking to expand their operations but may not have
the financial resources to do so.

Another important benefit of debentures is that they can be

customized to meet the specific needs of the company. For example,
companies can issue debentures with different interest rates,
maturities, and payment structures to attract investors with different
risk profiles. This flexibility allows companies to tailor their funding
options to their specific business needs and financial goals.

Furthermore, debentures can also be an attractive option for investors

looking for a fixed-income investment with a relatively low risk
profile. Debentures are typically rated by credit rating agencies, which
can provide investors with an indication of the creditworthiness of the
company issuing the debenture. This can help investors to make
informed investment decisions and mitigate the risk of default.

In conclusion, debentures are an important alternative source of

capital for companies in India. They provide a flexible and
customizable funding option for companies that may not be able to
secure traditional bank loans or equity financing. Debentures also
offer investors a relatively low-risk fixed-income investment option.
As such, debentures can be an important tool for companies looking
to expand their operations or pursue other strategic goals while
maintaining ownership and control of their business.

What are Debentures?

Debentures are a type of debt instrument that companies issue to raise

funds from investors. A debenture represents a loan that an investor
gives to the company, which the company promises to repay with
interest. Debentures are essentially a form of borrowing for the
company, and they carry a fixed rate of interest. Debentures are
usually long-term in nature, and they have a maturity period ranging
from 5 years to 30 years.

Features of Debentures

Debentures are a type of debt instrument that represents a long-term

loan taken by the issuing company. The key features of debentures
are:

Fixed rate of return: Debentures provide a fixed rate of return to

investors, which is agreed upon at the time of issuance. The interest
rate on debentures is generally higher than the interest rate on bank
loans.

Maturity period: Debentures have a fixed maturity period, which can

range from a few years to several decades. At the end of the maturity
period, the issuing company is obligated to repay the principal amount
to the investors.

Secured or unsecured: Debentures can be secured or unsecured.

Secured debentures are backed by the assets of the issuing company,
while unsecured debentures are not. Secured debentures provide a
higher level of security to the investors.

Transferability: Debentures are transferable instruments and can be

traded in the market. This provides liquidity to investors who may
wish to sell their debentures before maturity.

Advantages of Debentures

There are several advantages of debentures as an alternative source of

capital:

Fixed interest rate: Debentures provide a fixed rate of return to

investors, which is agreed upon at the time of issuance. This provides
certainty to the investors regarding their returns, making it a popular
investment option.

Lower cost of capital: Debentures generally have a lower cost of

capital compared to equity, as the interest paid on debentures is tax-
deductible for the issuing company.
No dilution of ownership: Debentures do not dilute the ownership of
the existing shareholders of the issuing company, unlike equity.

Long-term funding: Debentures provide long-term funding to the

issuing company, which is essential for large-scale projects or
investments.

Disadvantages of Debentures

There are also some disadvantages of debentures:

Fixed interest rate: While a fixed interest rate provides certainty to

investors, it can also be a disadvantage for the issuing company if
interest rates in the market decline.
Obligation to pay interest and principal: The issuing company is
obligated to pay interest and principal on debentures, irrespective of
its financial performance. This can become a burden if the company
faces financial difficulties.

Security requirement: If the debentures are secured, the issuing

company must provide security to the investors, which can limit its
ability to pledge its assets for other purposes.

Regulatory Framework for Debentures in India

In India, the issuance and regulation of debentures are governed by

the Companies Act, 2013, and the Securities and Exchange Board of
India (SEBI) regulations. The key regulations for debentures are:

Types of debentures : debentures with or without a call or put option,

perpetual debentures, and zero-coupon debentures.
Issuance process: The issuance of debentures by a company must be
authorized by its articles of association and approved by its board of
directors. The company must also obtain a credit rating from a
recognized credit rating agency and file a prospectus with the
Registrar of Companies.

Investor protection: SEBI regulations require companies to appoint a

debenture trustee to protect the interests of debenture holders. The
debenture trustee acts as an intermediary between the company and
the investors, ensuring that the company fulfills its obligations under
the debenture agreement.

Disclosure requirements: Companies must make adequate disclosures

in the prospectus and other public documents regarding the terms and
conditions of the debenture issue, credit rating, use of funds, and risk
factors.

Redemption of debentures: Companies must redeem their debentures

on maturity, and if they default on payments, debenture holders have
the right to initiate legal action against the company.

Conclusion
Debentures are a useful alternative source of capital for companies,
providing long-term funding at a lower cost compared to equity. They
offer a fixed rate of return to investors and are transferable, providing
liquidity to the investors. However, debentures also have some
disadvantages, such as the obligation to pay interest and principal, and
the need for security if they are secured debentures.

In India, debentures are regulated by the Companies Act and SEBI

regulations, which provide for investor protection and disclosure
requirements. Companies must ensure that they comply with these
regulations to protect the interests of their debenture holders.

After conducting research on the topic ‘Debentures as an alternative

source of capital’ as per Indian company law, it can be concluded that
debentures are a popular source of capital for Indian companies.
Debentures are a type of long-term debt instrument issued by
companies to raise funds from investors. They are considered as an
alternative source Of capital, as companies can raise funds without
diluting their ownership or control.

The study found that debentures offer several advantages to

companies, such as lower interest rates compared to bank loans,
longer repayment periods, and flexible repayment terms. Additionally,
debentures are a preferred investment option for investors who are
looking for a stable source of income, as they offer a fixed rate of
return.
However, the issuance of debentures comes with certain legal and
regulatory requirements. Companies must comply with the provisions
of the Companies Act, 2013, and the Securities and Exchange Board
of India (SEBI) regulations, which aim to protect the interests of
investors and promote transparency in the capital market.

One of the main challenges faced by companies when issuing

debentures is the cost involved in the process, including legal and
administrative fees. In addition, the creditworthiness of the company
plays a crucial role in determining the interest rates and investor
response to the debenture Issue.

Overall, debentures are an attractive source of capital for Indian

companies, as they provide a stable and cost-effective source of long-
term financing. However, companies must comply with legal and
regulatory requirements and carefully assess the creditworthiness of
their business before issuing debentures. Investors must also consider
the risks associated with investing in debentures and conduct due
diligence before investing in any company’s debenture issue.

References:

Companies Act, 2013. Ministry of Corporate Affairs, Government of

India.
SEBI (Issue and Listing of Debt Securities) Regulations, 2008.
Securities and Exchange Board of India.

Debentures. Investopedia. Available at

https://www.investopedia.com/terms/d/debenture.asp

Debentures. Economic Times. Available at

https://economictimes.indiatimes.com/definition/debentures