Important Terms Issued on Debentures

A company’s capital is raised with the help of the shares accumulated. However, the funds raised through this are rarely sufficient to fully support the company’s financial demands. As a result, most companies turn to debentures to fulfil their long-term financial needs, often issued via the private or public sector. Long-term debt is the phrase used to describe the funds raised through debentures. It becomes a win-win situation as the company owner can raise the necessary finances, whereas the holder of debentures will earn money through debenture interest.

Raising funds is one of the most challenging tasks a company has in its early stages. Though several choices are available, including Angel Investors, Bank Loans, Venture Capital, and Personal Investment, obtaining capital through the public debt issue is regarded as the most incredible option for a new company. Debentures are long-term instruments used by companies of various scales to borrow money at a fixed interest rate. Debenture Interest is the name given to this type of interest, and the person who has debentures is known as a debenture holder.

Elaboration on The Issue of Debentures

When a company acknowledges a debenture, the terms they will be redeemed at maturity are frequently specified. The term “redemption of debentures” refers to the discharge of debenture liability through reimbursement to the debenture holders. Debentures can be repaid at par value or a discount. The following six scenarios are frequent in practice, depending on debenture issuing and redemption terms and conditions.

(i) Issued at par and redeemable at par

(ii) Issued at a discount and redeemable at par

(iii) Issued at a premium and redeemable at par

(iv) Issued at par and redeemable at a premium

(v) Issued at a discount and redeemable at a premium

(vi) Issued at a premium and redeemable at a premium

Issue of Debentures

The method for issuing debentures is identical to that for issuing shares. Based on the prospectus provided by the company, prospective shareholders apply for debentures. The company may request payment in full on application, allotment, and numerous calls, or in instalments on application, allotment, and other calls. Debentures can be issued at par, at a discount, or at a premium. They can also be issued in exchange for something other than money or as a form of collateral security.

Issue of Debentures for Cash

When the given price of debt is equal to that of the face value, it is deemed to be issued at par.

Issue of Debentures at a Discount

The debenture is issued at a discount when its given price is below the nominal value.

Debentures issued at Premium

When the price exceeds its nominal value, it is termed a debenture issued at a premium.

Debentures issued for Consideration other than Cash

When a company buys assets from a vendor, instead of paying cash, in such cases, debentures are issued in exchange for the asset and thus are referred to as Debentures issued for consideration other than cash. The debentures may be at a premium, issued at par, or a discount, and the entries made in that case are identical to those made in the case of shares issued for consideration other than cash.

Issue of Debentures as a Collateral Security

When a company takes a loan or overdraft from a bank or other financial institution, collateral security can be specified as a subsidiary, secondary, or additional security in addition to the primary security. It may mortgage some properties as a secured loan against the given loan. If the amount runs short of the loan amount, then to avoid such situations, the lending institutions may need additional properties as collateral security so that the loan amount can be repaid in full using it. In this case, the corporation may issue its debentures to the lenders, in addition to the assets already pledged. Such kinds of issues are termed as ‘Debentures issued as Collateral Security.

The following are the essential pieces of legislation in India that govern the notion of Debenture Issue:

• Section 71 of the Companies Act, 2013;
• Rule 18 of the Companies (Share Capital and Debenture) Regulation, 2014.

Conclusion

When the amount to be collected on a debenture is equal to its nominal or face value, it is issued at par. It is considered to be issued at a premium if the issue price is higher than the nominal or face value. It is considered to be issued at a discount if the issue price is less than the nominal or face value. The amount of Premium received is credited to the ‘security premium account,’ whilst the discount allowed is debited to the “loss/discount on issue” account.