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Introduction

The corporate finance structure of a company is composed primarily of two types of funds: ownership capital, represented by shares, and borrowed capital, represented by instruments such as debentures, bonds, and loans. While shareholders are the owners of the company and bear both profits and risks, debenture-holders are creditors who lend money to the company in exchange for fixed returns and repayment of principal at a future date. Debentures form an essential part of the long-term financing of companies, allowing them to raise substantial funds without diluting ownership.

The law relating to debentures in India is primarily governed by the Companies Act, 2013, particularly Sections 71 to 74, along with the Companies (Share Capital and Debentures) Rules, 2014, and various SEBI regulations applicable to listed companies. In addition to this, the concept of nomination, which allows security holders to designate individuals to inherit their interests in securities or deposits upon their death, is contained in Section 72 of the same Act. Together, these provisions reflect the legal mechanisms for both raising debt capital through debentures and ensuring the orderly transfer of such interests upon the death of the holder.

The discussion that follows analyses the law of debentures and the power of nomination comprehensively, explaining their nature, types, legal requirements, rights, duties, and implications under Indian company law.

Part I – Debentures

Meaning and Nature of Debentures

The term debenture is derived from the Latin word debere, meaning “to owe.” A debenture is a written instrument acknowledging a debt. In corporate parlance, it signifies a certificate or instrument issued by a company under its common seal (where applicable) as an acknowledgment of a debt owed to the holder. It typically includes a promise to pay a specified sum, with or without interest, and may or may not be secured by a charge on the company’s assets.

Section 2(30) of the Companies Act, 2013 defines a debenture to include “debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.” This broad statutory definition recognises both secured and unsecured forms of debt instruments issued by companies. Debentures, therefore, represent an important mode of raising long-term funds by borrowing from the public or institutional investors without diluting shareholding control.

The essential characteristics of a debenture are that it evidences a debt, carries a fixed rate of interest payable irrespective of the company’s profits, and confers no voting rights on the holder. It may be issued with or without security and may be convertible into shares at a later date. Unlike shares, which constitute ownership interest, debentures represent a contractual debt obligation.

Types of Debentures

Indian company law recognises various types of debentures depending on security, convertibility, redemption, and registration.

A secured debenture is one backed by a charge on the company’s assets, either fixed or floating, providing a safeguard to debenture-holders in the event of default. An unsecured or naked debenture carries no such charge, relying solely on the company’s creditworthiness.

Debentures may also be convertible or non-convertible. Convertible debentures may be either fully or partly converted into equity shares after a specified period or upon meeting certain conditions. This type of debenture allows investors to benefit from future equity appreciation. Non-convertible debentures remain purely debt instruments, repaid at maturity.

Another classification is between redeemable and irredeemable debentures. Redeemable debentures are those that the company must repay at a specified time or upon the happening of a particular event. Irredeemable or perpetual debentures, though largely abolished under modern law, are those for which no redemption period is fixed.

Debentures may be registered or bearer instruments. Registered debentures are recorded in the company’s register of debenture-holders, and their transfer requires a formal instrument of transfer. Bearer debentures, transferable by mere delivery, are less common today due to concerns of security and compliance.

Legal Framework Governing Debentures

Section 71 of the Companies Act, 2013 governs the issue and regulation of debentures. It provides that a company may issue debentures with an option to convert such debentures into shares, wholly or partly, at the time of redemption, provided the issue is approved by a special resolution passed at a general meeting. This ensures shareholder consent where debt may later convert into equity, potentially diluting ownership.

Sub-section (2) of Section 71 prohibits the issue of debentures carrying voting rights. This principle maintains a clear distinction between debt and equity by ensuring that creditors do not interfere in the management decisions of the company.

Sub-section (3) mandates that secured debentures must be secured by the creation of a charge on the assets or property of the company of a sufficient value to cover the amount of debentures issued. The charge must be registered with the Registrar of Companies in accordance with Section 77 of the Act.

Sub-section (4) requires that a company issuing secured debentures appoint a debenture trustee before issuing the prospectus or offer letter. The trustee acts in the interest of debenture-holders, ensuring that the company complies with the terms of issue and that their interests are safeguarded.

The terms of the trust deed, the duties of the trustee, and the rights of debenture-holders are further regulated by the Companies (Share Capital and Debentures) Rules, 2014 and by SEBI (Debenture Trustees) Regulations, 1993, in the case of listed companies.

Sub-section (5) states that a company shall create a debenture redemption reserve out of its profits available for dividend. This reserve serves as a protective mechanism to ensure that funds are available for redemption of debentures when due.

Sub-section (6) provides that a company cannot issue debentures to raise money for the purpose of providing loans to or for the purchase of its own shares, aligning with the broader prohibition under Section 67.

Debenture Trust Deed and Trustee

The appointment of a debenture trustee is mandatory for public issues of debentures. The trustee acts as an intermediary between the issuing company and debenture-holders, representing the latter’s interests. The trust deed executed between the company and the trustee sets out the terms and conditions of the issue, including security, interest, redemption, and remedies in case of default.

The trustee’s duties include ensuring that the company maintains adequate security for the debentures, monitoring the utilisation of funds raised, and taking steps to protect debenture-holders’ rights if the company defaults. The trustee may, in the event of default, take possession of secured assets, apply for the appointment of a receiver, or initiate legal proceedings.

Judicial pronouncements have recognised the trustee’s role as fiduciary. In Industrial Development Bank of India v. Trustees of Debenture-Holders of Premier Automobiles Ltd. (2000 2 Comp LJ 436 Bom), the court observed that the trustee must act diligently and in good faith to safeguard the interests of debenture-holders, balancing their rights with the company’s legitimate interests.

Debenture Redemption Reserve (DRR)

To ensure financial prudence, the Companies Act requires companies to create a Debenture Redemption Reserve (DRR). The Ministry of Corporate Affairs has modified the DRR requirements over time through circulars. For instance, non-banking financial companies (NBFCs) and housing finance companies are exempted from maintaining a DRR, whereas other public limited companies must transfer a specified percentage of their profits to this reserve until redemption.

The DRR acts as a safeguard for investors by earmarking a portion of profits for the repayment of debentures. This statutory mechanism reduces the risk of default and ensures that redemption obligations are not compromised by managerial discretion.

Rights and Remedies of Debenture-Holders

Debenture-holders are creditors and not owners of the company. Their rights arise from the contract embodied in the debenture and the trust deed. They are entitled to receive interest at the agreed rate and repayment of principal upon maturity. In the event of default, they may enforce their security, seek appointment of a receiver, or apply for winding up of the company.

In Securities and Exchange Board of India v. Sahara India Real Estate Corporation Ltd. (2012 10 SCC 603), the Supreme Court reiterated that the issue of debentures to the public must comply with SEBI regulations, and failure to do so constitutes a violation of securities law. The judgment reinforced investor protection as a central objective of the debenture framework.

Convertible Debentures and Regulatory Oversight

Convertible debentures have gained popularity as hybrid instruments blending debt and equity characteristics. The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 govern public or rights issues of convertible debentures. The conversion ratio, price, and timing must be disclosed in the offer document.

The Supreme Court in Narendra Kumar Maheshwari v. Union of India (1989 2 SCC 358) clarified that conversion of debentures into shares does not constitute a fresh issue of capital if it is authorised at the time of the initial issue and approved by shareholders through a special resolution.

Convertible debentures thus offer flexibility to companies and investors, aligning repayment obligations with growth prospects while maintaining regulatory transparency.

Part II – Power to Nominate

Concept and Purpose

The concept of nomination in company law facilitates the smooth transmission of securities or deposits upon the death of the holder. Section 72 of the Companies Act, 2013 provides that every holder of securities of a company may nominate any person to whom the securities shall vest in the event of his death. Similarly, holders of fixed deposits may make such nominations.

The provision reflects a progressive approach that simplifies succession in respect of securities and protects the rights of legal heirs by ensuring that ownership or beneficial interest passes without unnecessary procedural delays or litigation.

Nomination is a declaration made by a shareholder or debenture-holder in favour of another person, usually a relative, specifying that upon the nominator’s death, the nominee shall be entitled to all rights in the securities so nominated. The purpose is to facilitate a straightforward transmission process without requiring succession certificates or probate, at least for operational purposes, while leaving the substantive ownership rights subject to succession laws.

Statutory Provisions under Section 72

Section 72(1) provides that the holder of securities may nominate any person to whom the securities shall vest in the event of the holder’s death. The nomination must be made in the prescribed manner and filed with the company.

Sub-section (2) extends the same facility to depositors of the company, allowing them to nominate a person who shall receive the amount of deposit upon their death.

Sub-section (3) provides that the nominee, upon the death of the holder, shall become entitled to all rights in the securities or deposits to the exclusion of all other persons, unless the nomination is varied or cancelled. This sub-section has generated interpretational debate, particularly regarding the nominee’s rights vis-à-vis legal heirs.

Rights of the Nominee and Legal Heirs

The legal question that often arises is whether the nominee becomes the absolute owner of the securities upon the death of the holder or merely a trustee for the legal heirs. Indian courts have interpreted the provision in light of general succession law and the objectives of nomination.

In Sarbati Devi v. Usha Devi (1984 1 SCC 424), though decided under the Life Insurance Act, the Supreme Court held that a nominee does not become the owner of the amount payable upon the death of the policyholder but merely receives it as a trustee for the legal heirs. This principle has been extended to securities and bank deposits in later cases.

In Shakti Yezdani v. Jayanand Jayant Salgaonkar (2017 7 SCC 415), the Supreme Court specifically examined nomination under the Companies Act and held that nomination does not override succession law. The nominee holds the securities in trust for the legal heirs of the deceased holder. The judgment clarified that Section 72 facilitates transmission but does not confer absolute ownership unless the nomination is backed by testamentary disposition.

Thus, while companies are legally bound to transfer securities to the nominee upon production of death certificates, the ultimate ownership may still be contested among heirs under inheritance law. The nominee acts as a facilitator rather than a substitute for legal succession.

Procedure for Making a Nomination

A nomination must be made in the prescribed form and filed with the company or its registrar and transfer agent. The nomination can be varied or cancelled at any time by submitting a fresh nomination form. Joint holders may together nominate one person, and in case of multiple joint holders, the nomination takes effect only upon the death of all joint holders.

Companies must record the nomination in the register of members or debenture-holders and acknowledge receipt to the security holder. Upon the death of the holder, the nominee must submit proof of death, identity documents, and any other required details to effect transmission of the securities.

Nomination in the Context of Dematerialised Securities

With the dematerialisation of securities under the Depositories Act, 1996, nominations are now recorded electronically through depositories such as NSDL and CDSL. Investors can make or change nominations online through their depository participants. The depository transmits the securities directly to the nominee’s demat account upon the holder’s death, subject to verification.

The SEBI (Depositories and Participants) Regulations, 2018 make it mandatory for investors to provide nomination details when opening demat accounts, ensuring systematic record-keeping and reducing disputes.

Judicial Interpretation and Case Law

Indian jurisprudence has evolved to reconcile the statutory right of nomination with principles of succession. Courts have held that companies and depositories are protected when they transfer securities to a nominee, even if later disputes arise among heirs.

In Harsha Nitin Kokate v. The Saraswat Co-operative Bank Ltd. (2010 SCC OnLine Bom 1949), the Bombay High Court initially held that nomination confers ownership rights on the nominee under Section 109A of the Companies Act, 1956 (now Section 72). However, this view was later overruled in Shakti Yezdani v. Jayanand Salgaonkar, reaffirming that nomination does not supersede inheritance rights.

The prevailing view, therefore, is that nomination ensures operational convenience and continuity but does not alter substantive property rights governed by succession law.

Significance of Nomination in Corporate Practice

Nomination serves as an important mechanism for corporate efficiency and investor protection. It ensures that the nominee can immediately exercise rights such as receiving dividends, interest, or redemption proceeds without delay. It also reduces the administrative burden on companies that would otherwise require legal documents such as succession certificates for every transfer.

From a policy perspective, nomination promotes ease of doing business and protects investors, particularly in a market where a large portion of securities are held by individuals. However, legal clarity must always be maintained between the rights of nominees and heirs to prevent disputes.

Part III – Analytical Discussion

The legal frameworks governing debentures and nomination reflect two complementary aspects of corporate law: the efficient raising of capital and the orderly transmission of ownership interests. Debentures enable companies to mobilise long-term funds without compromising control, while nomination ensures that the rights arising from such securities can be smoothly transmitted upon death.

Both areas demonstrate the evolving sophistication of Indian company law in balancing flexibility with accountability. The law of debentures emphasises investor protection through mechanisms like the debenture trustee, redemption reserve, and SEBI oversight. Similarly, the law of nomination prioritises administrative efficiency while respecting the principles of succession.

Modern corporate jurisprudence increasingly recognises the interplay between contractual obligations and personal property rights. For example, while the issuance of debentures is purely contractual, their transmission upon the holder’s death involves inheritance law considerations. Similarly, while nomination facilitates the company’s administrative function, it cannot displace legal ownership under personal law.

These complexities require careful interpretation by courts and regulators to ensure coherence between corporate governance and property rights.

Conclusion

Debentures and the power to nominate, though distinct in nature, collectively illustrate the structural and human dimensions of corporate finance. Debentures represent the lifeblood of corporate borrowing, providing companies with a stable source of long-term funds while offering investors a secure, income-generating instrument. The Companies Act, 2013, through Section 71 and related provisions, establishes a comprehensive framework ensuring that debenture-holders’ interests are protected through mandatory trusteeship, creation of security, and maintenance of redemption reserves. Judicial interpretation and SEBI’s regulatory supervision further reinforce transparency and investor confidence in the debenture market.

The power to nominate under Section 72 complements this framework by ensuring that rights in securities and deposits are transmitted efficiently upon the death of the holder. It simplifies procedural complexities, promotes ease of business, and safeguards the interests of surviving family members. However, as judicial decisions clarify, nomination operates as a statutory mechanism for transmission, not succession, and does not override the rights of legal heirs under personal law.

Together, these provisions embody the dual objectives of modern company law: the facilitation of capital formation and the protection of individual rights within a coherent legal system. The evolution of jurisprudence on debentures and nomination reflects India’s ongoing effort to align corporate practice with international standards while preserving fairness, investor confidence, and rule of law.

In the final analysis, the legal regime for debentures and nomination under the Companies Act, 2013 demonstrates how corporate law can simultaneously serve commercial efficiency and social justice — enabling companies to thrive while safeguarding the legitimate expectations of creditors, investors, and heirs alike.