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Perpetual or Irredeemable Debentures under Companies Act

Under the Companies Act, 2013, the definition or meaning of Perpetual or Irredeemable Debentures is not specifically given.

What is a perpetual or irredeemable debenture?

A perpetual or irredeemable debenture is the kind of debenture wherein the company issuing such debentures is not under the obligation to redeem (paying back) the value of the debt instruments under any circumstances except in certain cases as mentioned herein at the end.

Interest: But the company will have to make payment of interest on such debt instruments when it is due periodically as agreed in writing.

Tenure: It is called irredeemable or perpetual because the date of redemption is not fixed at the time of issue. Hence, the debt instrument has a perpetual life time.


Can a company issue irredeemable/ perpetual debenture?

There is no specific restriction provided in the Companies Act or rules made thereunder in this regard. But there are a couple of important things to note in this matter.

Secured irredeemable debentures

As per Rule 18(1)(a) of the Companies (Share Capital and Debentures) Rule, 2014, the companies can issue secured debentures provided the date of its redemption shall not exceed 10 years from the date of issue. (For certain classes of companies as mentioned in the said Rule 18, the allowed limit is 30 years.)

Hence, from the above provisions, it can be interpreted that a company can not issue secured irredeemable debentures, simply because of the reason that in case of irredeemable debentures - the date of redemption is not fixed at all.

Unsecured irredeemable debentures

Further, with reference to the above descriptions, as there is no restriction under the Act or rules thereunder regarding fixing of the date of redemption for unsecured irredeemable debenture - it can be interpreted that a company can issue unsecured irredeemable debenture.





Circumstances wherein perpetual / irredeemable debentures can be redeemed:

(i) on the winding up / liquidation of the company;
(ii) on the expiry of a very long period fixed by company;
(iii) on the occurrence of a certain contingent event;
(iv) If the company wishes to repay back the amount by taking shareholder's approval. There is no clarity on this option though under the Companies Act.




Comments

  1. Venkata Ramana Rao19 August, 2018

    very well explained. thank you for the information on perpetual debenture. helpful in clearing some doubts.

    ReplyDelete
  2. Well explained.. But I personally feel, when irredeemable preference shares are not allowed now, which is supposed to be owners' capital, how can borrowed capital be allowed to be issued as irredeemable ?debentures

    ReplyDelete
    Replies
    1. Yes, under section 55(1) the companies limited by shares are not allowed to issue any preference shares which are irredeemable.

      But neither under section 71 of the Companies Act, 2013 nor under rule 18 of the Companies (Share Capital and Debentures) Rules, 2014, there are any clear restriction on issue of unsecured irredeemable debentures.

      Hence, it is open to interpretation that such issue is indirectly permitted.

      Delete

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