Issue of Debentures Part 1

Download PDF of This Page (Size: 245K)

In order to raise capital any company will look into different sources. Capital can be raised through issue of shares, issue of debentures and from long term borrowings. After issue of shares company will give priority to issue of debentures. Debenture is a document (certificate) issued under company seal. It is an acknowledgement of the loan received by company from debenture holders. Every debenture bears details regarding value of debenture, redemption date, rate of interest, mode of repayment of interest etc. Debenture holder is a creditor of the company.

Definition of Debenture as per Companies Act, 1956- “Debenture includes debenture stock, bond and any other securities of the company whether constituting a charge on the company’s assets or not”.

Types of Debentures:

Image of Types Classification of Debentures

Image of Types Classification of Debentures

Image of Types Classification of Debentures

From Security Point of View

(i) Secured or Mortgage debentures: These debentures are secured by a charge on the assets of the company. These debenture holders have the right to recover their principal amount along with interest out of the assets mortgaged by the company. In India, debentures must be secured. Secured debentures can be of two types:

(a) First mortgage debentures: These debenture holders have first claim on the assets charged.

(b) Second mortgage debentures: These debenture holders have a second claim on the assets charged.

(ii) Unsecured debentures: These debentures do not have any security with regard to principal and unpaid interest. These are also called as simple debentures.

On the Basis of Redemption

(i) Redeemable debentures: These are the debentures which are issued for a fixed period. Company agrees to repay the borrowed amount on a certain date or after a specific period of notice. These can be redeemed by annual drawings or by purchasing from the open market.

(ii) Non-redeemable debentures: These are the debentures which do not carry any date of redemption and they are perpetual debentures. Such debentures are paid back only when the company goes into liquidation.

On the Basis of Records

(i) Registered debentures: Registered debentures will be issued only to the debenture holders who are registered with the company and these debentures are not negotiable. And these debentures cannot be transferred to other person unless the regular instrument of transfer is sanctioned by the directors of the company.

(ii) Bearer debentures: These debenture holders are not recorded in register of a company and they are easily transferable by delivery. Also these debenture holders entitled to get interest.

On the Basis of Convertibility

(i) Convertible debentures: These debentures can be converted into equity or stock of the company on the expiry of predetermined period and the terms and conditions regarding convertibility announced at the time of issue of debentures.

(ii) Non-convertible debentures: These debentures cannot be converted into equity or stock of the company and they carry high rate of interest.

On the Basis of Priority

(i) First debentures: These are redeemed before the redemption of other debentures.

(ii) Second debentures: These are redeemed after the redemption of first debentures.

Issue of Debentures:

Issue of Debentures is similar to that of issue of shares. Firstly, Prospectus is issued then applications are invited to the subscription of debentures. Finally, company allots the debentures based on different conditions. If the debentures are over-subscribed, they will be adjusted towards subsequent calls or else the excess applications will be cancelled and total amount will be refunded. The issue of Debentures can be issued for cash or for consideration other than cash or issued as collateral security. The issue can be at par value or at premium value or at discount.

Accounting treatment will be different in different cases of issue of debentures.

Developed by: