Vol 5 (2008) - Issue 3

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Remedies of Foreign Bond Holders as Creditors in India

In the recent years, euro issues through the issue of foreign currency denominated global bonds issued to eligible foreign investors have been a popular means for raising finance by listed Indian corporates.

A global bond is a tradable form of a loan denominated in US Dollars and treated as an external commercial borrowing (‘ECB’). They are usually obligations of the issuer company with regard to certain future cash flows representing interest and principal, which the issuer undertakes to pay to the legal owner of the instrument. These are governed by the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993, the regulations under the Foreign Exchange Management Act, 1999 and the guidelines issued by the Reserve Bank of India on External Commercial Borrowings and Trade Credits (‘ECB Guidelines’) from time to time.

Global bonds have proved to be an attractive mode of investment for investors, due to guaranteed payments in the form of interest and yield on maturity and options for tradability, liquidity and conversion into equity. These instruments may carry an option for the investor to convert the bonds into the equity of the issuer company or may be plain non-convertible bonds earning periodic interest till redemption and redeemed with or without a premium on maturity. Whether convertible or not, during their currency, global bonds create a debt obligation on the issuer company and are therefore essentially debt instruments. The bonds are issued in global form under an offering memorandum or introductory document containing details of the terms of the offering. Further, the issuer executes a Trust Deed to appoint a suitable trustee to represent the bond holders and act on their behalf and for their benefit, similar to the appointment of a debenture trustee for the benefit of debenture holders in a company.

It is common to find in the terms of offering of such bonds that the bonds shall forthwith become due and repayable upon the occurrence of an event of default under the bonds. Further the terms would also authorise the trustee to institute such proceedings against the Issuer as it may think fit to enforce the terms of the Trust Deed and the bonds upon the occurrence of a default.

The Indian Companies Act, 1956 (‘Companies Act’), does not per se recognise, these instruments as a separate class of security. However, Section 2(12) of the Companies Act defines the term ‘debentures’ as including ‘debenture stock’, bonds and other securities of a company, whether constituting a charge on the assets of the company or not. The term ‘securities’ is defined under the Securities Contracts (Regulations) Act, 1956 (‘SCRA’), to include shares, scrips, stocks, bonds, debentures, debenture stock or other marketable security of a like nature in or of any incorporated company or other body corporate.

In the case of R.D Goyal and another v Reliance Industries Ltd. [(2003)1 SCC 81], the Supreme Court, while considering the meaning of debentures, observed that,

‘Debentures, as ordinarily understood, in our considered view, would not come within the purview of definition of goods as it is simply an instrument of acknowledgement of debt by the company whereby it undertakes to pay the amount covered by it and till then it undertakes further to pay interest thereon to the debenture-holders.’

Palmer on Company Law has observed in paragraph 44.02, 24th edn., that in modern commercial usage, a debenture denotes an instrument issued by the company normally but not necessarily called on the face of it a debenture, and providing for the payment of a specified sum at a fixed rate with interest thereon.

The High Court of Bombay held in Laxman Bharmaji v Emperor [AIR 1946 Bom. 18] that in determining whether an instrument is a debenture or not, the court must look at the substance of the instrument itself, and without the assistance of any precise legal definition, form the best opinion it can whether the instrument is a debenture or not.