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INTRODUCTION :

visit a company and preparation of an informative report


on the procedure of issue of shares or debentures.A
debenture is a type of debt instrument that is not secured
by physical assets or collateral. Debentures are backed
only by the general creditworthiness and reputation of the
issuer. Both corporations and governments frequently
issue this type of bond to secure capital. Like other types
of bonds, debentures are documented in an indenture.

Debenture holders (investors) do not have any rights to


vote in the company’s general meetings of shareholders,
but they are allowed separate meetings or votes e.g. on
changes to the rights attached to the debentures.

The interest paid to debenture holders is calculated as a


charge against profit in the company’s financial
statements.

The main advantage of debentures to companies is the fact


that they have a lower interest rate than e.g. overdrafts.
Also, they are usually repayable at a date far off in the
future.

For an investor, their main advantages are that they are


often easy to sell in stock exchanges and they contain less
risk than other options such as equities

AIMS AND OBJECTIVES :


The project aims to visit a company and preparation of
informative report on the procedure of issue of shares or
debentures

Objectives of the study are

1. To learn what is debentures


2. To learn different types of debentures
3. To learn how debentures are issued
4. To learn who can issue debentures
5. To learn who can buy debentures
6. To learn different requirements for issue of
debentures
7. To learn the conditions for the issue of debentures

DETAIL REPORT OF PROJECT :

The procedure for the issue of debentures is as follows:

(1) First of all, a Board meeting is convened at which the


decision to issue debentures, the number and terms of
issue and the rate of interest is taken by means of a
resolution to that effect. However, where a company’s
shares are listed on the stock exchange, the listing
agreement stipulates that shareholders’ approval should
be obtained for the offer of debentures to the public and
therefore this approval is also to be obtained.

(2) Then the consent of the Controller of Capital Issues is


obtained if the issue exceeds Rs 50 lakhs. If the money to
be borrowed, together with the money already borrowed
by the company (apart from temporary loans) exceed the
aggregate of the paid-up capital of the company and its
free reserves, permission of the General Body is also
obtained, by ordinary resolution, for the proposed issue
[Sec.

(3) In the case of issue of listed debentures to the public


by public limited companies, the guidelines prescribed
by the Government in that regard (discussed under the
preceding heading) must be fully complied

(4) In case the debenture to be issued are bearer ones, it


will be necessary to obtain permission from the Reserve
Bank of India as well.

(5) In case the debentures are issued under a Trust Deed,


necessary consent of trustees is obtained and a draft of
Trust Deed is prepared. A draft of a prospectus and the
Debenture Bond is also prepared.

(6) After the completion of these formalities, the Board


approves the drafts of a prospectus, Trust Deed, and
debenture bonds and directs the secretary to arrange for
their printing.

(7) The Trust Deed is then executed with the trustees for
debenture holders.

(8) The particulars of the charges created on the issue are


to be filed with the Registrar of Companies within 30
days of the execution of the Trust Deed for registration
and a Certificate of Registration is obtained. This
Certificate is to be endorsed on every Debenture Certi-
ficate. All particulars are also entered in the “Registrar of
Charges” maintained by the company at its registered
office.

(9) Where it is proposed to enlist the debentures in any


stock exchange approval of the concerned stock
exchange is to be obtained.

(10) A copy of the prospectus is then filed with the


Registrar and the Prospectus is issued to the public. In
case the debentures are to be issued privately (without
making a public offer) a statement in lieu of prospectus is
to be filed with the Registrar at least three days before
the first allotment of debentures.

(11) After the allotment, the particulars about each


debenture are entered in the Registrar of
Debenture-holders and Debenture Certificates are
prepared which are issued to the Allotters in due course.

ANALYSIS OF DATA :
ISSUE OF DEBENTURE AT PAR

When the issue price of the debenture is equal to its face


value, the debenture is said to be issued at par. When a
debenture is issued at par, the long-term borrowings in
the liabilities section of the balance sheet equals the cash
in the assets side of the balance sheet. Thus, no further
adjustment is required to balance the assets and the
liabilities of the company. The company can collect the
whole amount in one installment i.e on an application or
in two installments i.e. on an application and subsequent
allotment. However, there might be a scenario in which
money is collected in more than two installments i.e. on
an application, on an allotment and at various calls by the
company.

ISSUE OF DEBENTURE AT DISCOUNT

The debenture is said to be issued at a discount when the


issue price is below its nominal value. Let us take an
example – a Rs. 100 debenture is issued at Rs. 90, then
Rs.10 is the discount amount. In such a scenario, the
liabilities and the assets sides of the balance sheet do not
match. Thus, the discount on debentures’ issuance is
noted as a capital loss and is charged to ‘Securities
Premium Account’ and is reflected as an asset. The
discount can be written off later.

Types of Debentures
There are various types of debentures like
redeemable, irredeemable / perpetual, convertible,
non-convertible, fully secured, partly secured, mortgage,
unsecured, naked, first mortgaged, second mortgaged, the
bearer, fixed, floating rate, coupon rate, zero
coupon, secured premium notes, callable, puttable, etc.
The debenture classification is based on their tenure,
redemption, mode of redemption, convertibility, security,
transferability, type of interest rate, coupon rate,
etc. Ultimately, a debenture is not like a standard product
configured strictly. It is an agreement to be agreed
between the corporation and the debenture holders that
decides the characteristics of a debenture. Following are
some examples of agreement templates for ready
reference and quick drafting.
REDEEMABLE AND IRREDEEMABLE
(PERPETUAL) DEBENTURES
Redeemable debentures carry a specific date of
redemption on the certificate. The company is legally
bound to repay the principal amount to the debenture
holders on that date. On the other hand, irredeemable
debentures, also known as perpetual debentures, do not
carry any date of redemption. This means that there is no
specific time of redemption of these debentures. They are
redeemed either on the liquidationof the company or as
per the terms of the issue, when the company chooses to
pay them off to reduce their liability by issues a due
notice to the debenture holders beforehand.
Convertibility
CONVERTIBLE AND NON-CONVERTIBLE
DEBENTURES
Convertible debenture holders have an option of
converting their holdings into equity shares. The rate of
conversion and the period after which the conversion will
take effect are declared in the terms and conditions of the
agreement of debentures at the time of issue. On the
contrary, non-convertible debentures are simple
debentures with no such option of getting converted into
equity. Their state will always remain of a debt and will
not become equity at any point in time.
It is essential to prepare an agreement that clearly
expresses all the terms and conditions. For ready
reference, find the Convertible Debenture Template here.

FULLY AND PARTLY CONVERTIBLE


DEBENTURES
Convertible Debentures are further classified into two –
Fully and Partly Convertible. Fully convertible
debentures are completely converted into equity whereas
the partly convertible debentures have two parts.
Convertible part is converted into equity as per the
agreed rate of exchange based on an agreement.
Non-convertible part becomes as good as redeemable
debenture which is repaid after the expiry of the agreed
period.
Security
SECURED (MORTGAGE) AND UNSECURED
(NAKED) DEBENTURES
Debentures can be secured in nature, it may be unsecured
in nature. Secured debenture is secured by the charge on
some asset or set of assets which is known as secured or
mortgage debenture and another when it is issued solely
on the credibility of the issuer is known as the naked or
unsecured debenture. A trustee is appointed for holding
the secured asset which is quite obvious as the title
cannot be assigned to each and every debenture holder.
FIRST MORTGAGED AND SECOND MORTGAGED
DEBENTURES
Secured / Mortgaged debentures are further classified
into two types – first and second mortgaged debentures.
There is no restriction on issuing different types of
debentures provided there is a clarity on claims of those
debenture holders on the assets of the company at the
time of liquidation. First mortgaged debentures have the
first charge over the assets of the company whereas the
second mortgage has the secondary charge which means
the realization of the assets will first fulfill the obligation
of first mortgage debentures and then will do for second
ones.
Transferability / Registration
REGISTERED UNREGISTERED DEBENTURES
(BEARER) DEBENTURE
In the case of registered debentures, the name, address,
and other holding details are registered with the issuing
company and whenever such debenture is transferred by
the holder; it has to be informed to the issuing company
for updating in its records. Otherwise, the interest and
principal will go the previous holder because the
company will pay to the one who is registered. Whereas,
the unregistered commonly known as bearer debenture.
can be transferred by mere delivery to the new holder.
They are considered as good as currency notes due to
their easy transferability. The interest and principal are
paid to the person who produces the coupons, which are
attached to the debenture certificate. and the certificate
respectively.
Type of Interest Rates
FIXED AND FLOATING RATE DEBENTURES
Fixed rate debentures have fixed interest rate over the
life of the debentures. Contrarily, the floating rate
debentures have the floating rate of interest which is
dependent on some benchmark rate say LIBOR (London
Inter Bank Offer Rate), PLR (Prime Lending Rate) etc.
No Coupon Rate
ZERO COUPON AND SPECIFIC RATE
DEBENTURES
Zero coupon debentures do not carry any coupon rate or
we can say that there is zero coupon rate. The debenture
holder will not get any interest on these types of
debentures. Need not get surprised, for compensating
against no interest, companies issue them at a discounted
price which is less compared to the face value of it. The
implicit interest or benefit is the difference between the
issue price and the face value of that debenture. These
debentures are to be redeemed at face value. These are
also known as ‘Deep Discount Bonds’. All other
debentures with a specified rate of interest are specific
rate debentures which are just like a normal debenture.
SECURED PREMIUM NOTES / DEBENTURES
These are secured debentures which are redeemed at a
premium over the face value of the debentures. They are
similar to zero coupon bonds. The only difference is that
the discount and premium. Zero coupon bonds are issued
at the discount and redeemed at par whereas the secured
premium notes are issued at par and redeemed at the
premium.
Mode of Redemption
CALLABLE AND PUTTABLE DEBENTURES /
BONDS
Whenever a corporation is borrowing for long term, by
issuing fixed rate debentures, it has a risk of decrease in
rate of interest in market. Suppose, a company is issuing
20 years debentures offering rate of interest 7 %, after 5
years similar debentures can be issued in market offering
rate of interest 4 %, then for corporation there will be
comparatively higher cost with existing debenture. So,
the corporation may issue long term debenture with
callable feature in which it will have a right to redeem
the debenture in between. However in this case usually
the company will offer premium to investor in case of
early redemption. In case puttable debentures, the option
lies with the investors for early redemption. Generally a
company who is in bad need of money will issue Puttable
debenture. In this case debenture holders can ask the
company to redeem their debenture and ask for principal
repayment. This type of security can be issued by the
company to avoid hostile take over.
SUBORDINATED DEBENTURE
In these types of debentures, the debenture is given
priority of payment after other debts, when a company
goes into liquidation. They are also known as
subordinated loan, subordinated bonds, subordinated
debt or junior debt. Usually they will be offered higher
return as they undertake more risk.
PARTICIPATING DEBENTURE
It is a method of financing in case of venture capital
financing. It carries interest in three phases. During
initial phase, no interest is charged. During subsequent
stage interest is charged at a lower rate of interest, up to a
particular level of operation. After that high rate of
interest is charged.

ISSUE OF DEBENTURE AT PREMIUM

When the price of the debenture is more than its nominal


value, it is said to be issued at a premium. For example, a
Rs. 100 debenture is issued for Rs.105 and Rs.5 is the
premium amount. Again, assets and liabilities do not
match in such situation. Therefore, the premium amount
is credited to Securities Premium Account and is
reflected under ‘Reserves and Surpluses’ on the
liabilities side of the balance sheet.

CONCLUSION :
Several companies decide to issue debentures to raise
capital, along with the other sources of long-term finance.
The companies need to follow the regulations and the
procedure associated with the issuance of debentures.
Further, they also need to account debentures issued at a
par, premium or discount accordingly.

DISCUSSION :

The advantage of Debentures:


Following are some of the advantages of debentures:

(a) An issue of debenture does not result in dilution of


interest of equity shareholders as they do not have right
either to vote or take part in the management of the
company.

(b) Interest on debenture is a tax-deductible expenditure


and thus it saves income tax.

(c) Cost of a debenture is relatively lower than


preference shares and equity shares.

(d) The issue of debentures is advantageous during times


of inflation.

(e) Interest on debenture is payable even if there is a loss,


so debenture holders bear no risk.

Disadvantages of Debentures:
Following are the disadvantages of debentures:

(a) Payment of interest on debenture is obligatory and


hence it becomes a burden if the company incurs a loss.

ADVERTISEMENTS:
(b) Debentures are issued to trade on equity but too much
dependence on debentures increases the financial risk of
the company.

(c) Redemption of debenture involves a larger amount of


cash outflow.

(d) During the depression, the profit of the company goes


on declining and it becomes difficult for the company to
pay interest.

SUGGESTION:
Here are some of the benefits of buying debentures

 Listing of NCDs on exchanges like NSE & BSE


provides liquidity to your investments
 No tax Deducted at Source (TDS) on listed
debentures
 Investment tenure ranging from 2 to as much as 20
years provides you with ample options to fulfill your
financial goals
 Unlike FDs, NCDs have limited lock-in period
which makes them attractive as far as liquidity is
concerned
 Ratings by agencies like CARE, FITCH, CRISIL,
ICRA enables you to assess the quality of debt papers
before investment
 Option of holding bonds in ‘Demat Form’ makes
your investments easy to handle & monitor