What Is a Debenture Deed?
A debenture deed is the document that creates and evidences the loan obligation of a company to the debenture holders and the security (charge) created on the company's assets. Under Section 71 of the Companies Act, 2013: companies can issue debentures (secured or unsecured) to raise debt capital. Secured debentures are backed by a charge on the company's assets (first charge = priority over other creditors; second charge = subordinate to the first charge holder). The debenture deed specifies: the principal amount, interest rate, repayment schedule, security, covenants, and events of default.
First Charge vs Second Charge
| Feature | First Charge | Second Charge |
|---|---|---|
| Priority | FIRST priority — paid first from secured assets | SECOND priority — paid after first charge holder |
| Risk | Lower — first claim on assets | Higher — residual claim after first charge |
| Interest Rate | Lower (lower risk) | Higher (higher risk premium) |
| Lender | Typically banks/FIs | Typically NBFCs/supplementary lenders |
| Consent | No consent needed | First charge holder's consent usually required |
Key Clauses of Debenture Deed
1. Parties: Company (borrower) and debenture holders (or debenture trustee on behalf of holders). 2. Amount: "The Company has created and issued [Number] secured debentures of Rs. [Face Value] each, aggregating to Rs. [Total Amount]." 3. Interest: "[X]% per annum, payable [quarterly/semi-annually/annually] on [dates]." 4. Redemption: "The debentures shall be redeemed at par on [Date] / in [Number] equal installments commencing [Date]." 5. Security: "The debentures are secured by a [first/second/pari passu] charge on: (a) [specific immovable property — description], (b) [movable assets — plant, machinery], (c) [current assets — stock, receivables — floating charge]." 6. Covenants: (a) maintain asset coverage ratio of [1.25x-1.5x], (b) not create any prior or pari passu charge without consent, (c) maintain insurance on charged assets, (d) comply with all applicable laws, (e) provide financial statements to the trustee. 7. Events of Default: (a) non-payment of interest/principal for [30] days, (b) breach of covenant, (c) insolvency, (d) winding up order, (e) cross-default. 8. Remedies: On default: the trustee/debenture holders may: (a) declare all debentures immediately due, (b) enforce the security — take possession and sell the charged assets, (c) appoint a receiver.
Section 71 Compliance
(a) Debenture Redemption Reserve (DRR): Listed companies issuing debentures must create a DRR — at least 10% of outstanding debentures (reduced from 25% by MCA notification 2019). Deposit at least 15% of debentures maturing in the current year + next year in specified securities/deposits. (b) Debenture Trust Deed: For secured debentures: a Debenture Trust Deed must be executed (within 60 days of allotment) appointing a debenture trustee — typically a scheduled bank, insurance company, or registered trustee company. (c) Charge Registration: File Form CHG-1 with ROC within 30 days of creating the charge — registering the debenture security. Non-filing: the charge is void against the liquidator and creditors. (d) Allotment Filing: File Form PAS-3 (return of allotment) within 30 days of debenture allotment.
ROC Filing — CHG-1
Under Section 77: every company creating a charge on its property/assets must file Form CHG-1 with the ROC within 30 days. The form includes: (a) nature of charge (first/second/floating), (b) description of property charged, (c) amount secured, (d) charge holder details. Late filing: up to 300 days with additional fees (condonation by Central Government). Beyond 300 days: charge cannot be registered — requires NCLT application under Section 87.
Disclaimer: This article is for informational purposes only and does not constitute legal or professional advice. While every effort has been made to ensure accuracy based on the latest laws and amendments, readers should consult a qualified professional before acting on any information provided. For expert assistance, contact us.