Allotment of Debentures
As in the case of shares, in the case of debentures also, it is necessary for the auditor to verify whether allotment was made having regard to the terms and conditions contained in the prospectus or the Statement in lieu of Prospectus. The Companies (Amendment) Act, 1988 has made it compulsory for every company intending to offer debentures to the public for subscription the issue of a prospectus shall, before such issue, make an application to one or more recognised stock exchanges for permission for the debentures intending to be so offered to be dealt with in the stock exchange or each such stock exchange. The auditor also must ascertain that the directors, while issuing the debentures, had acted within their powers having regard to restrictions contained in Section 293 and any further restrictions which may be contained the Articles of Association. Section 117A has now made it compulsory for filing of Debenture Trust Deed and creation of Debenture Redemption Reserve as per section 117B. It is specified that Debenture Trust Deed shall be open for inspection and can be made available on payment. The creations of Debenture Redemption Reserve is compulsory and it is further specified that this amount cannot be utilised for any other purpose except for redemption of debentures. Section 117B has also made it compulsory appointment of debenture trustees and specified their duties. The following are the steps that should be taken for such a verification :
- Verify that the Prospectus or the Statement in lieu of Prospectus had been duly filed with the Registrar before the date of allotment.
- Check the applications for debentures with the Application and Allotment Book to verify that the name, address of the applicants and the number of debentures applied for are correctly recorded.
- Verify the allotment of debentures reference to the Directors’ Minute Book.
- Vouch the amounts collected as are entered in the Cash Book with the counterfoils of receipts issued to the applicants; also trace the amounts into the Application and Allotment Book.
- Check postings of allotments of debentures and the amounts received in respect thereof from the Application and Allotment Book, into the Debentures Register.
- Verify the entries on the counterfoils of debentures issued with the Debentures Register.
- Extract balances in the Debentures Register in respect of amounts paid the debenture holders and agree their total with the balance in the Debentures Account in the General Ledger.
- Examine a copy of the Debenture Trust Deed and note the conditions including creation of Debenture Redemption Reserve contained therein as to issue and repayment.
- If the debentures are covered a mortgage or charge, it should be verified that the charge has been correctly recorded in the Register of Mortgages and Charges and that it has also been registered with the Registrar of Companies. Further, that the charge is clearly disclosed in the Balance Sheet.
- Compliance with SEBI Guidelines should also be seen.
Where debentures have been issued as fully paid up to vendors as a part of the purchase consideration, the contract in this regard should be referred to.