If a company needs money without reducing its equity status, the Company selects a Debentures Issue. It is a debt to the Company. It is similar to borrowing money that needs to be repaid over a while. Debentures have a fixed interest rate. Both organizations and governments often issue debentures to raise funds or capital. This article emphasizes all about debentures under the Companies Act, 2013.
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Meaning of Debentures
A debenture is one of the financial market tools that help businesses to raise money in the market to grow their business. The word debenture is derived from the Latin word “debere” meaning to borrow or borrow money. In the vernacular, a loan can be defined as acknowledging a loan issued by a company to a third party under a common company logo. Following Section 2 (30) of the Companies Act, 2013, credit cards include loans issued by a company as proof of debt incurred by that company, either by creating or not imposing a charge on the company’s assets.
Attributes of Debentures
- For Cash– As described above, debentures are usually issued to raise company funds. It is mainly issued for cash. Debts can be deducted by rate, discount, or premium.
- Debentures as collateral– A collateral security is additional security when a company receives a loan or overdrafts from a bank or any other financial institution. Debentures disbursed as such liability are contingent on the company, only if the company does not repay the loan and the interest from which the debt will arise.
- Loans that are issued as a non-cash consideration- This is another type of debentures issued. Sometimes a company needs certain goods or equipment, plants, or large equipment at a cost. The company does not have to have money at the time of payment. Therefore, instead of paying in cash, the Company reimburses the seller for a loan against that purchase and payment terms of consideration other than cash.
Types of Debentures
- Unsecured/Secured Debts: As the name implies, a debenture issue can be secured by a loan or payment on the company premises and if the same is not secured it is known as an unsecured (nominal collateral) debenture.
- Convertible/Non- Convertible Debentures: Debentures disbursements may be of these two types too, which means that they can be converted into equity shares on a specified date or for the occurrence of a particular event as determined in the Debenture Trust Deed.
- Redeemable/Irredeemable Debentures: Redeemable debentures mean that the debentures will be redeemed at the end of the expiry period and non-redeemable debentures mean that the company will not be able to repay its loans and only interest will be paid to creditors until the company wishes to redeem or cancel debts.
Use of debentures
Debentures are issued by a company to raise money in the market. Such funds are then used by the company to conduct research and development and market growth. Debentures or debt financing is preferred over the equity of shares for two main reasons namely that the issuance of loans does not lead to a reduction in corporate ownership and the cost of raising the debt is cheaper compared to the cost of raising equity.
Debenture redemption
- Conducting Board Meeting for the redemption of the debenture.
- Approach creditors regarding the redemption
- Referral to banks for reimbursement
- Changes to the debenture register
- Changes to the credit register, if charge created on debenture
In the case of Compulsory Debenture/Convertible debenture, if at the time of issuing the shareholders’ approval was taking conversion part and if the loan is redeemed at the company’s expense, the approval of shareholders is required.
Final words
We have discussed all about debentures under the Companies Act, 2013. Considering its diversity, the debts are issued by the company as required by the investor investing in the company. If the investor insists on issuing the initial mortgage to provide more security in addition to the secured loan agreement, the company may issue such a deposit to the investor, which also depends on the financial need of the company. In the normal course of business, registered unregulated securities are issued by the company as it protects investors in the company’s failure to recover the principal value. When an investor prefers to own shares in a company after a specified period, the company may be required to issue full or voluntary flexible debts.
