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    Debentures

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    Umesh Gaikwad
    Debentures are debt instruments issued by companies to investors. There are various types of debentures that differ based on security, tenure, registration, coupon rates, and convertibility. Unlisted debentures, the focus of this document, are higher risk than bank deposits but offer higher interest rates. They are not governed by listing authorities and lack oversight, posing risks to investors. The document outlines various debenture types and identifies a lack of guidelines for unlisted company debentures. It also notes cases where companies issued debentures but did not file required financial reports, potentially scamming investors.

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    Debentures

    Uploaded by

    Umesh Gaikwad
    326 views6 pages
    Debentures are debt instruments issued by companies to investors. There are various types of debentures that differ based on security, tenure, registration, coupon rates, and convertibility. Unlisted debentures, the focus of this document, are higher risk than bank deposits but offer higher interest rates. They are not governed by listing authorities and lack oversight, posing risks to investors. The document outlines various debenture types and identifies a lack of guidelines for unlisted company debentures. It also notes cases where companies issued debentures but did not file required financial reports, potentially scamming investors.

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    Debentures

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    Debentures are debt instruments issued by companies to investors. There are various types of debentures that differ based on security, tenure, registration, coupon rates, and convertibility. Unlisted debentures, the focus of this document, are higher risk than bank deposits but offer higher interest rates. They are not governed by listing authorities and lack oversight, posing risks to investors. The document outlines various debenture types and identifies a lack of guidelines for unlisted company debentures. It also notes cases where companies issued debentures but did not file required financial reports, potentially scamming investors.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    326 views6 pages

    Debentures

    Uploaded by

    Umesh Gaikwad
    Debentures are debt instruments issued by companies to investors. There are various types of debentures that differ based on security, tenure, registration, coupon rates, and convertibility. Unlisted debentures, the focus of this document, are higher risk than bank deposits but offer higher interest rates. They are not governed by listing authorities and lack oversight, posing risks to investors. The document outlines various debenture types and identifies a lack of guidelines for unlisted company debentures. It also notes cases where companies issued debentures but did not file required financial reports, potentially scamming investors.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 6

    Debentures differ on the basis on terms and conditions on which they are issued.

    Security:

    Secured/Mortgage Debentures: Debentures secured against assets of the


    company .i.e. if the company is winding up, assets will be sold and debenture
    holders will be paid back. The charge/mortgage may be fixed or a floating charge.
    If it is fixed, charge is on a specific asset say plant, machinery etc. If it is floating
    charge, it means it is on general assets of the company.

    Which assets are charged: The ones available with the company presently and also
    assets in future

    Mortgage deed: Includes nature/value of the security, date of interest payment, and
    rate of interest, repayment terms, and rights of the debenture holders if the

    company defaults. In the event of default of company to pay interest or principal


    installment, they can recover their money via the assets mortgaged.

    Unsecured/Naked Debentures: Debentures not secured against assets of the


    company .i.e. if the company is winding up, assets will be not be sold in order to
    pay the debenture holders. In other words, no charge is created on the assets of the
    company which means that there is no security of interest and principal payment.
    The creditworthiness and soundness of the company serves as a security.

    Tenure:

    Redeemable Debentures: Debentures which have to be repaid within a certain


    specified period. Eg: 5% 2 years Rs. 1000 debenture means redeemable period is 2
    years(5%:interest/coupon payment). After redemption, they can be reissued.

    Irredeemable/Perpetual Debentures: These can be paid back at any time during


    the life of the company .i.e. there is no specified period for redemption. Hence
    they are also called Perpetual Debentures. Nonetheless if the company has to wind
    up, then they have to repay the debenture holders.

    Registration:

    Registered Debentures: As the name suggested, these are debentures that are
    registered with the company. It records all details of debenture holdings such as
    name, address, particulars of holding etc. Interest shall be paid only to the
    registered holder (treated as a non-negotiable instrument). They can be transferred
    by a transfer deed.

    Bearer Debentures: These can be transferred by mere delivery. Company does


    not hold records for the debenture holder. Interest will be paid to the one who
    displays the interest coupon attached to the debenture.

    Coupon:

    Zero Coupon Debentures: Does not have a specified interest rate, thereby to
    compensate, they are issued at a substantial discount. Interest: Difference in face
    value and issue price.

    Specific Coupon rate Debentures: Debentures are normally issued with an


    interest rate which is nothing but the coupon rate. It can be fixed or floating.
    Floating is associated with the bank rates.

    Convertibility:

    Convertible Debentures (Fully/ Partly convertible): Debentures which can be


    converted to either equity shares or preference shares by the company or
    debenture holders at a specified rate after a certain period. A company can also
    issue Partly Convertible Debentures whereby only a part of the amount can be
    converted to equity/preference shares.

    Non Convertible Debentures (NCDs): These cant be converted into


    equity/preference shares.

    Issue relating to Debentures (Unlisted).


    Background on Debentures
    A debenture is a document that either creates a debt or acknowledges it.
    As per section 2(12) of Companies Act 1956/Section 2(30) of the Companies
    Act 2013 Debenture includes debenture stock, bond and any other
    securities of the company whether constituting a charge on the companys
    assets or not.
    Simply, it can be stated that issue of debenture means collection of money
    from people by the company for the specified purpose. The company issues
    a certificate of debenture and receives money against it.
    Unlisted debentures are type of interest paying investments . Companies
    provide them as a way to raise funds from investors. In returns for your
    money, the company promise to make regular payments and return the
    money you lent them on a date in the future.
    Unlisted debentures usually offer higher interest rate than bank deposits but
    also carry higher risks.
    TYPES/NATURE OF DEBENTURES
    (I)
    SecuredorMortgagedebentures:Thesearethedebenturesthat
    aresecuredbyachargeontheassetsofthecompany.Theseare alsocalledmortgagedebenture
    s.
    (II)
    Unsecureddebentures:Debentureswhichdonotcarryany
    securitywithregardtotheprincipalamountorunpaidinterestare
    debentures. These are called simple debentures.

    called

    unsecured

    (III) Redeemabledebentures:Thesearethedebentureswhichare
    issuedforafixedperiod.Theprincipalamountofsuchdebentures
    ispaidofftothedebentureholdersontheexpiryofsuchperiod.
    Thesecanberedeemedbyannualdrawingsorbypurchasingfrom theopenmarket.
    (IV) Non-redeemable debentures : These are the debentures which are not
    redeemed in the life time of the company. Such debentures are paid back only when
    the company goes into liquidation.
    (V)
    Registered debentures : These are the debentures that are
    registeredwiththecompany.Theamountofsuchdebenturesis
    payableonlytothosedebentureholderswhosenameappearsin theregisterofthecompany.

    (VI) Bearerdebentures:Thesearethedebentureswhicharenot
    recorded in a register of the company. Such debentures are
    transferrablemerelyby delivery.Holderofthesedebenturesis entitledtogettheinterest.
    (VII) Convertibledebentures:Thesearethedebenturesthatcanbe
    convertedintosharesofthecompanyontheexpiryofpredecided
    period. The term and conditions of conversion are generally
    announcedatthetimeofissueofdebentures.
    (VIII) Non-convertibledebentures:Thedebentureholdersofsuch
    debentures cannotconverttheirdebenturesintosharesofthe company.
    (IX)

    First debentures : These debentures are redeemed before other debentures.

    (X)
    Second debentures : These debentures are redeemed after the redemption of
    first debentures
    It is clear from the existing laws that there is a specified mechanism/Guidelines for issue of
    debentures in case of Listed Companies and generally they are govern by listing authoritiesbut as
    regards to issue of debentures by unlisted companies there is no mechanism/Specified guidelines
    for issue of debentures. In case of unlisted Companies, the risk is more as there is no authority
    who controls/examine such cases. As per section 117 of the companies Act, 1956, for issue of
    secured debentures, accompany is required to make a debenture trust deed and appoint
    adebenture trustee who shall be assigned the duties of debenture trustee. The company has to
    create security and debenture redemption reserve account for payment of amount to debenture
    holders. As per section 71 of the companies Act, 2013, almost same conditions are given as
    prescribed in section 117 of the Companies Act, 1956. Still percentage of security value to be
    covered for repayment of debenture amount is not specified in the rules/Act. Duties of debenture
    trustee shall also be covered as per Trustee Act for better protection of interest of debenture
    holders which is not mentioned in Companies Act, 2013.Even Government authorites do not
    have any specific information that in how many cases people lost the money invested in unlisted
    companies.
    In last many years it was observed that the various companies were registered all over the India
    and has issued secured debentures by way of filing Form No 10/Form No. CHG-9 as per
    Companies Act, 1956/Companies Act, 2013 respectively but after issuing debentures various
    companies has not filed there due Annual Return and Balance Sheet since incorporation. It might
    possible that the company were registered only for issuing debentures and to collect money from
    General public. A list of 32 companies (in the state of Madhya Pradesh in last two-three years) is
    attached herewith which has issued secured debentures but has not filed there overdue Annual
    Return and Balance Sheet since incorporation. Prosecution is being filed against these
    companies, it is under process.

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