What is the difference in regulations when a private company (limited by shares) issues debentures instead of preference shares to raise capital?

Fact is, a private company limited by shares can issue debentures and preference shares to raise capital. There are a quite a number of ventures that happen use this route to raise funds, but the catch is the compliance that follows the two routes. Regulations and compliance for each of these routes are what we would be having a glance at. Please note, these are sensitive compliance works, and we strongly suggest you to hire a well-qualified Lawyer for this work, We can help you 🙂 

Situation 1: Raising funds in exchange for debentures.

  • A company may issue debentures with the option to convert such debentures into shares, either wholly or partly at the time of redemption. Section 71 of the Companies Act, 2013 would apply.
  • Provisions of a private placement of securities (Section 42) need to be complied with if debenture proposed to be issued through a private placement.
  • In addition to above, provisions Section 62 needs to be complied with if Issues of convertible debenture are through Preferential allotment.
  • Issue of debenture with the option to convert into shares (wholly or partially) shall be approved by a special resolution passed at the general meeting.
  • Debenture cannot be issued carrying voting rights.

Situation 2: Raising funds in exchange for Preference Shares

  • Preference shares, on the other hand, can be issued subject to the conditions stipulated in Section 55 of the Companies Act, 2013. The procedure of issuance and increase of capital would, however, be governed by Section 62 of the Companies Act, 2013.
  • The requirements/conditions include:
  1. The company not eligible to issue preference shares which are irredeemable.
  2. The issue of preference shares to be authorized by AOA of the Company.
  3. The company can issue only those pref. shares which are redeemable not exceeding 20 years from the date of its issue.
  4. The issue of preference shares to be authorized by a special resolution in the general meeting.
  5. There should not be subsisting default in the payment of dividend on existing preference shares.
  6. Resolution authoring the issue of preference shares to set out matter as prescribed under rules
  7. Price of such shares to be determined by the valuation report of a registered valuer.
  8. Price of a listed company shall not be required to be determined by the valuation report of a registered valuer.


Wazzeer
is vouched by entrepreneurs as reliable legal, accounting, and compliance partner for years now. We would be happy to help you create success stories, without any delay, let's connect!