Secured Corporate Debentures Vs. Public Deposit Norms

Secured Corporate Debentures Vs. Public Deposit 

The Ministry of Corporate Affairs, vide a notification dated 21^st March 2013  (“Notification”), has 

made a change in Companies (Acceptance of Deposits) Rules 1975 (“Deposit Rules”). 

Why are debentures “public deposits”?

It may sound doubtful as to how debentures are treated as public deposits at all. However, the definition of the

 term “deposit” in corporate laws in India is much wider than what is commonly thought. Any amount received, 

refundable with or without interest, is a deposit. There are certain exceptions laid down in Rule 2 (b) of the 

Deposit Rules. Hence, even if an amount is raised by issue of debentures, it is still a deposit, unless it falls in 

one of the exceptions listed in Rule 2 (b).

Prior to the Notification, Rule 2(b)(x) of the Deposits Rules exempted debentures if:

“any amount raised by the issue of bonds or debentures secured by the mortgage of any immovable 

property of the company or with an option to convert them into shares in the company provided that in 

the case of such bonds or debentures secured by the mortgage of any immovable property the amount o

f such bonds or debentures shall not exceed the market value of such immovable property.”

As is evident, there were two exceptions – debentures secured by mortgage of immovable property, and 

convertible debentures.

However, with this Notification, Ministry has reworded and replaced the said Rule with the following:

“any amount raised by the issue of bonds or debentures secured by the mortgage of any fixed assets 

referred to in Schedule VI of the Act excluding intangible assets of the company or with an option to 

convert them into shares in the company:

Provided that in the case of such bonds or debentures secured by the mortgage of any fixed assets 

referred to in Schedule VI or of the Act excluding intangible assets the amount of such bonds or 

debentures shall not exceed the market value of such fixed assets.”

           

As an effect of the Notification, now, the issue of debentures or bonds will be exempt from the Deposit 

Rules if: a) the issue is secured by mortgage of any fixed asset of the company as referred in Schedule VI 

having market value more or equal to the value of the issue; or b) the issue is of the convertible 

debentures.

Since the law has been changed from “mortgage of immovable property” to “mortgage of fixed assets”, it appears that the charge may be created on any of the fixed assets of the company. However, use of word mortgage has limited the flexibility.