Directors of a company in exercise of the powers vested in them may raise a loan by issue of debentures with or without creating a charge on the assets of the company. Debenture holders do not carry any voting right. When a charge is created over some of the assets, debentures are described as mortgage debentures. The terms and conditions on which the loan is raised, together with particulars of property charged as security for their repayment are printed on the debenture bonds along with a certificate showing that the charges have been registered with the Registrar. It is also customary to create a trusteeship in favour of one or more persons whenever some property belonging to the company is charged as security for repayment of the debentures. The trustees have all the powers of a mortgagee of the property and can act in whatever way they think expedient to safeguard the interest of the debenture holders. By the inclusion of section 119 in the Companies Act, 1956, the trustees of debenture holders now are expected to show the same degree of care and diligence in the administration of the debenture trusts as is required of other trusts. They cannot avoid such liability which they could do before. Both the members and debenture holders, if they so desire, can obtain a copy of the trust-deed from the company. Debentures, once redeemed, can always be reissued subject to restriction contained in section 121 (1) of the Act. The inclusions of section 117A, 117B and 117C has made compulsory for the appointment of trustees and creation of reserve for redemption of debentures by the Companies (Amendment) Act, 2000. The debenture bonds are issued to various debenture holders and entries in respect thereof are made in the books of account in exactly the same way as in the case of shares. Therefore, the amount received on issue of debentures should be vouched in the same way as the amount received on issue of capital. Apart from this various steps involved in the verification of debentures are stated below :
- Prepare a schedule of debenture holders with reference to the Register of debenture holders and tally the total amount received from debenture holders in respect of different classes of debentures that are outstanding for payment with the total of debentures as shown in the General Ledger.
- Study the Memorandum and Articles of the company to ascertain the borrowing powers of the company ; also whether any limitation has been placed thereon. In addition, it should be verified whether the limit on borrowing imposed by the provision of section 229(1)(d) is operative or has
been relaxed by a resolution of the shareholders.
- Inspect a copy of the debenture bonds that have been issued in acknowledgement of amounts received to ascertain the terms of repayment and particulars of the assets charged as security for the repayment of the amount ; and verify that all the requirements of the Act relating to their issue
have been fully complied with.
- See in the case of mortgagee debentures, that the obligations undertaken by the company under the debentures trust deed to the debenture holders were being strictly honoured.
- Confirm that the undermentioned information, required by law, has been duly communicated to the Registrar of Companies :
- Particulars of charges which have been created over the assets of the company (Section 125).
- Particulars in case of series of debentures entitling holder pari passu (Section 128).
- Information in regard to commission or discount paid on subscription of debentures (Section 129).
- Information in regard to satisfaction in whole, or in part, of any charge relating to the property of the company (Section 138).
- Verify that the provisions regarding redemption has been duly complied with. Debentures may be redeemable according to the terms of issue at specified dates by annual or other drawings or, at the option of the company, after due notice has been given of the intent to repay. While vouching
entries in respect of debentures redeemed, the minutes of the Board of Directors authorising their redemption should be referred to for authority and the cancelled debenture bonds of stock certificates should be examined.
If some debentures have been purchased in the open market, it should be seen that these are being shown as an investment of Sinking Fund if that is the case, in the Balance Sheet. Any surplus arising on redemption of debentures is capital profit. The balance left to the credit of the Sinking Fund Account, in excess of the value of debentures redeemed on account of profit made on sale of securities held as an investment of the Sinking Fund or due to debentures having been redeemed at a discount, would also be capital profit. However, according to Clause 3(xii)(b) of Part II to Schedule VI of the Companies Act, it is necessary to disclose the amount of such profits in the Profit and Loss Account of the company. When it is transferred directly to the Capital Reserve Account a note should be added to the Balance Sheet to disclose that fact. If the debentures are redeemed at a premium, the amount of the premium should be written off by debit to the Profit and Loss Account. If a Sinking Fund for redemption of debentures is being operated by means of an insurance policy it should be verified that the policy has been duly assigned in favour of trustees for debenture holders. Debentures are treated as secured loans in the matter of disclosure of security provided against their repayment. The condition of redemption together with the earliest date it shall take place, are also disclosed.
If the company has redeemed certain debentures which it is authorised to reissue, particulars thereof also are disclosed. Likewise, when any debentures are held by a nominee or trustee for the company, their nominal amount is disclosed together with the issue price (Part I, Schedule VI). As in the case of other loans, the provision for interest accrued but not matured for payment, is shown separately under the head ‘Current Liabilities and Provisions’ but that accrued and payable is shown along with the debentures. Such a distinction is made on the ground that whereas the first mentioned interest is a
provision, the second is a debt.
Debenture Trust Deed: The Companies (Amendment) Act, 2000 has introduced sections 117A, 117B and 117C to protect the interests of debenture holders. These requirements are in addition to requirements of SEBI as well. Section 117A requires compulsory creation of debenture trust deed while section 117B deals with appointment of debenture trustees and duties thereof. Section 117C requires a company to create security and debenture redemption reserve.
CARO, 2003 Requirements: The auditor, under Clause 4(xix) of the Order is required to examine whether the company has created any ‘security’ or ‘charge’ for the debentures issued by it. The auditor is required to comment upon the creation of security or charge in respect of debentures issued by the company by creating proper charges on the assets of the company. Where the company has issued any debentures, the auditor should also examine the debenture trust deed executed under section 117A of the Act. The auditor should pay particular attention to verify whether proper security has been created in favour of the debenture trust. The security creation can be verified by examining the relevant documents creating the charge in favour of the trustees for the debenture holders duly registered in the concerned Registrar’s office if the security is an immovable property. Readers’ attention is also invited to the Guidance Note on Certification of Documents for Registration of Charges issued by the Institute of Chartered Accountants of India. If the debentures have been issued towards the end of the year and the securities are created subsequently then, to present a complete and balanced picture while reporting the fact that the security in respect of debentures is yet to be created, the auditor would be well advised to also mention the reason for the same, viz., that the debentures have been issued only recently (specify the month of issue) and that the company is taking steps to create the security. However, he should report as above only where, as a result of his enquiries, he is satisfied that the non- creation of security is not due to deliberate or inadvertent delay on the part of the company and that it is in fact in the process of creation of security.