Company Account: Issue of Debentures

Q.1. What do you mean by the term Debenture? What are the kinds of Debentures? Answer: When a company desires to borrow a considerable sum of money for its expansion, it invites the general public to subscribe to its debentures. A debenture is a certificate issued by the company acknowledging the debt due by it to its holders and is issued by means of a prospectus in the same manner as shares. Kinds of Debentures: The following are the various types of debentures issued by a company:
1. Security Point of View i. Secured Debentures (Mortgaged):

Mortgaged debentures are those debentures which are secured on a particular asset of the company. ii. Unsecured Debentures: When debentures are issued without any charge or security, they are termed as unsecured or naked debentures. Holders of unsecured debentures are ordinary unsecured creditors and do not enjoy any special rights. 2. Redemption Point of View i. Redeemable Debentures: Such debentures are redeemable at par or premium after the expiry of a particular period or under a system of periodical drawings. ii. Irredeemable Debentures: Debentures may be made irredeemable or in other words perpetual. Such debentures are redeemable either on the happening of a contingency or when the company is wound up or when the company decides to redeem. 3. Convertibility Point of View
i.

ii.

Convertible Debentures: Debentures may be convertible into equity or preference shares of the company on certain dates or during certain periods on the basis of an agreement between company and debenture holders. Non-Convertible Debentures: Such debentures are not convertible into equity or preference shares.

4. Transferability Point of view i. Registered Debentures: Registered Debentures are those which are payable only to the registered debenture holders. Such debentures are transferable only by trust deed. ii. Bearer Debentures: Bearer debentures are those which are payable to their bearers or holders Q.2. Briefly explain the following concepts:
1. Debentures 2. Bond 3. Charge 1

4. Debenture Stock

Answer: 1. Debentures: The word Debenture is used to signify the acknowledgement of a debt, given under the seal of the company and containing a contract for the repayment of the principal sum at a specified date and for the payment of interest (usually half yearly) at a fixed rate until the principal sum is repaid and it may or may not give a charge on the assets of the company as security for the loan. Section 2 (12) of the Companies Act states that "a debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not". 2. Bond: Bond is similar to that of debenture both in terms of contents and texture. Traditionally government issued the bonds, but now these are also issued by semi-government and nongovernment organizations. The significant difference between bonds and debentures is with respect to the issue condition i.e., bonds can be issued without predetermined rte of interest. 3. Charge: A charge is created on certain specified assets generally immovable such as land and building, plant and machinery, long term investments and the like. So it is equivalent to mortgage. When the charge is fixed, the company can only deal with the property subject to the charge, that is, a fixed charge allows the company to retain possession of the assets but prevents the company from selling, leasing etc., of the assets without the consent of the charge holders. The property identified remains so identified during the period for which the charge is created. 4. Debenture Stock: Debenture stock is a document representing the loan capital of the company consolidated into one single composite debt which may be divided into the transferable in convenient units of fixed amount. This sum may be of any amount and may include fraction of a rupee. Certificates are issued to each debenture stockholder indicating the amount of his contribution or holding. The debenture stock must be fully paid. Debenture is always for a fixed sum and is transferable only in its entirety by a debenture stock may be the consideration of the several debenture amounts and a single certificate issued covering many debenture. Similarly debenture stock may be transferable in parts if articles so permit. Q.3. Distinguish between Shares and Debentures.

Q.4. Explain the meaning of debentures issued as collateral security by a company. Show its treatment in the Balance Sheet. Answer: When debentures are issued as security in addition to any other security against a loan or bank overdraft such an issue of debentures is known as issue of debentures as collateral security. The idea of such an issue is that if the company does not repay the loan
2

and the interest and the main security is not sufficient, the bank will be entitled to sell the debentures in the market or the bank may keep the debentures with it. If the company repays the loan, the bank will return the debentures issued as collateral security to the company. No entry needs to be passed in the books of the company because debentures are issued only as a collateral security. Debentures become alive only when loan is not repaid. The fact of such an issue of debentures must be clearly stated in the Balance Sheet by way of a note under the loan and debentures as shown below: