Convertible debentures

[RKS]

Dear Members,

One company is proposing the issue compulsorily convertible debentures
worth Rs. 12, 00, 000.

Authorised Capital of the company is Rs. 20, 00, 000
Paid up Capital of the company is Rs. 10, 00, 000


Once the conversion happens the Paid up Capital will be Rs. 22, 00,
000 ie. it will be above the Authorised Capital.

So, is it necessary for the company to raise Authorised Capital
before going with the issue of convertible debentures. If yes, where
it is said like that? or after issue also company can raise Authorised
capital.

Regards,
Karthik

[Priti Astarag Patnaik]

Sir,

 

I think you can increase the Authorised capital at any time either before or after the issue of debentures but before conversion of debentures in to shares.

--
with regards,

Mr. Priti Astarag Patnaik

[subodh zare]

It is advisable to keep some difference in the post issue Authorised and paid up Capital.

 

But, May I know how you will arive at Conversion rate in your case (if it is not pre-decided)?

[RKS]

Dear Subodh,

It is predecided only. The figures I gave is imaginary but the impact
is same.

Suppose we issue without sufficient Authorised Share Capital. In
future, the existing members can prospone the issue by saying that
sufficient capital is not there. Even the ordinary resolution also
they can defeat if they stay united and donot want to dilute the
ownership.

Regards,
Karthik

On Feb 6, 3:33 pm, subodh zare <subod...@gmail.com> wrote:
> It is advisable to keep some difference in the post issue Authorised and
> paid up Capital.
>
> But, May I know how you will arive at Conversion rate in your case (if it is
> not pre-decided)?
>
> On Fri, Feb 6, 2009 at 3:42 PM, Priti Astarag Patnaik

> <papatn...@gmail.com>wrote:

>
>
>
> > Sir,
>
> > I think you can increase the Authorised capital at any time either before
> > or after the issue of debentures but before conversion of debentures in to
> > shares.
>

> >  On Fri, Feb 6, 2009 at 3:32 PM, RKS <rkarthik...@gmail.com> wrote:
>
> >> Dear Members,
>
> >> One company is proposing the issue compulsorily convertible debentures
> >> worth Rs. 12, 00, 000.
>
> >> Authorised Capital of the company is Rs. 20, 00, 000
> >> Paid up Capital of the company is Rs. 10, 00, 000
>
> >> Once the conversion happens the Paid up Capital will be Rs. 22, 00,
> >> 000 ie. it will be above the Authorised Capital.
>
> >> So,  is it necessary for the company to raise Authorised Capital
> >> before going with the issue of convertible debentures. If yes, where
> >> it is said like that? or after issue also company can raise Authorised
> >> capital.
>
> >> Regards,
> >> Karthik
>
> > --
> > with regards,
>

> > Mr. Priti Astarag Patnaik- Hide quoted text -
>
> - Show quoted text -

[madhwesh acharya]

Dear Karthik,

 

There are three stages included in conversion of debenture into shares:

 

1. Issue of debentures (this doesnot affect the capital structure of the company)

 

2. Excercise of option by debenture holders (this increases the subscribed capital of the company)

 

3. Allotment of shares by the company (this increases the paid up capital)

 

Hence, before the 2nd stage itself, the authorized capital of the company should be increased.

 

Going forward for your additional query, regarding the existing members not agreeing for conversion, please note the following:

 

1. For not to give effect to conversion, the company need not even call an EGM. Not passing a board resolution for alloting the shares will hold the debentures from conversion.

 

2. However, at the time of issue of debentures, the company has agreed to convert the same into shares on a future date. Hence, when the conversion is due, if the company says that it will not convert the shares, then such debenture holders have remedy to approach judiciary and get the debentures converted. More over, whether such convertion can be postponed, is a question of arrangement between the company and the debenture holders. (Please note that i am using the word "company" in this paragraph. Company is different from its members. The fact that the members say no to some transaction to which the company has already agreed, will not take away the company from the liability towards such transaction).

 

3. Further, for a public company, for issue of such convertible debentures, Section 81 (3) proviso (a) & (b) of the Companies Act 1956 provides that - Members of the company through special resolution and also the Central Government - should have approved the terms and conditions of such debenture issue. Otherwise, at the time of conversion, such conversion should be approved by members by a special resolution under sub section (1A). If the members have already approved as per proviso to sub section (3), then the debenture holders will have more voice infront of the judicial authorities.

The existing shareholder's contention that the ownership will get diluted, will not have a stand infront of the jury.

 

Hence, according to me, entering into an arrangement with debenture holders is the only option to handle the issue.

--
Regards,
Madhwesh K
Company Secretary
Bangalore
9945399584

[RKS]

Thank you Madhwesh.

I just have one additional query connected to debenture issue not
convertible. Is it necessary to execute a trust deed even in the case
of unsecured debentures?

Regards,
Karthik

> Section 81 (3) *proviso *(a) & (b) of the Companies Act 1956 provides that -

> Members of the company through special resolution and also the Central
> Government - should have approved the terms and conditions of such debenture
> issue. Otherwise, at the time of conversion, such conversion should be
> approved by members by a special resolution under sub section (1A). If the

> members have already approved as per *proviso *to sub section (3), then the

> 9945399584- Hide quoted text -

[subodh zare]

Similarly, where the convertible debentures are alloted pursuant to FDI, what shall be additional compliances?

[madhwesh acharya]

Dear Karthik,

 

Execution of trust deed for issue of unsecured debenture is - compulsory in the case of listed company (under DIP guidelines - debt issue) and optional in case of unlisted companies.

 

Member's views are welcomed.