CBSE Class 11 » CBSE Class 11 Study Materials » Accounting » Important Terms Issued on Debentures

Important Terms Issued on Debentures

Terms of Issue of Debentures is related to the way of authorizing a business under sign in acknowledgment of any sort of debt that the company has taken. The process of issuing debentures is mostly similar to that of issuing shares by any company.

A capital of a company is raised with the help of the shares accumulated. However, the funds raised through this are rarely sufficient to give full support to the company’s financial demands. As a result, most companies turn to debentures to fulfill their long-term financial needs, which are 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 difficult tasks that a company has in its early stages. Though there are several choices available, including Angel Investors, Bank Loans, Venture Capital, and Personal Investment, obtaining capital through the public issue of debt is regarded as the greatest 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 on which 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 the terms and conditions of debenture issuing and redemption:

 (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 said to be 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, debentures are issued in exchange for the asset and thus are referred Debentures issued for consideration other than cash. The debentures may be at a premium, issued at par, or a discount, and the entries which are 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 important 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 said to be 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,’ while the amount of discount allowed is debited to the “loss/discount on issue” account.

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Frequently Asked Questions

Get answers to the most common queries related to the CBSE Class 11 Examination Preparation.

Explain the rules relating to the issue of debentures?

Answer. It is not possible to issue debenture via voting rights. When a company issues a debenture, it establ...Read full

Is it possible for debenture holders to vote?

Answer. No, Debenture holders do not have voting rights at the company’s general meetings of shareholde...Read full

Is it possible to issue debentures without any interest?

Answer. Yes, Debentures with zero Interest Rates are possible: This so...Read full

Is it possible for a shareholder to become a debenture holder?

Answer: Debentures can be changed into shares, but shares can never be turned ...Read full

Is it possible to convert debentures into shares?

 Answer: The debenture can usually only be changed into stock when a certain amount of time has passed, as s...Read full

What are the features of the Fixed Capital Method?

Answer: Certain features help in the distinction between Fixed and Fluctuating Capital Accounts. Those featur...Read full