What are Perpetual / Irredeemable Debentures (Debt Instruments)?

Perpetual debentures are the irredeemable debentures wherein a Company is under no obligation to repay back the borrowed debt instrument value during its life time. Though the interest amount fixed on such debentures will have to be paid.

Under the erstwhile Companies Act, 1956 - there was specific provisions for this, which is reproduced as under:

"Section 120. PERPETUAL DEBENTURES A condition contained in any debentures or in any deed for securing any debentures, whether issued or executed before or after the commencement of this Act, shall not be invalid by reason only that thereby, the debentures are made irredeemable or redeemable only on the happening of a contingency, however remote, or on the expiration of a period, however long."

Under the new Companies Act, 2013 - there is no specific provision regarding Perpetual or Irredeemable Debentures.

However, there are no restrictions imposed on the Companies prohibiting its issue. Indirectly, from the analysis of the following provisions, it can be interpreted that a Company can issue Unsecured Perpetual Debentures only.

Rule 18(1)(a) of the Companies (Share Capital and Debentures) Rule, 2014 prescribes that :

   "An issue of secured debentures may be made, provided the date of its redemption shall not exceed ten years from the date of issue.

 Provided that the following classes of companies may issue secured debentures for a period exceeding ten years but not exceeding thirty years,

(i) Companies engaged in setting up of infrastructure projects;

(ii) 'Infrastructure Finance Companies' as defined in clause (viia) of sub direction (1) of direction 2 of Non-Banking Financial (Non-deposit accepting or holding) Companies Prudential Norms (Reserve Bank) Directions, 2007;

(iii) Infrastructure Debt Fund Non-Banking Financial Companies’ as defined in clause (b) of direction 3 of Infrastructure Debt Fund Non-Banking Financial Companies (Reserve Bank) Directions, 2011;

(iv) Companies permitted by a Ministry or Department of the Central Government oi by Reserve Bank of India or by the National Housing Bank or by any other statutory authority to issue debentures for a period exceeding ten years."

Hence, there is a maximum time period for redemption is fixed for secured debentures. Otherwise we can say - Irredeemable secured debentures can not be issued.

Since, there is no restriction on time period for redemption on unsecured debentures. It can be said that Irredeemable unsecured debentures can be issued.

Circumstances in which perpetual / irredeemable debentures can be redeemed:

(1) On the winding up / liquidation of the Company;

(2) On the expiry of a very long period fixed by Company;

(3) On the occurrence of a certain contingent event;

(4) If Company wish to repay back the amount by taking shareholder's approval. (There is no clarity on this option though under the Companies Act).

1 comment:

  1. Venkata Ramana Rao8/19/2018

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


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