Debenture

In law, a debenture is a document that either creates a debt or acknowledges it. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note. Debentures are generally freely transferable by the debenture holder. Debenture holders have no rights to vote in the company's general meetings of shareholders, but they may have separate meetings or votes e.g. on changes to the rights attached to the debentures. The interest paid to them is a charge against profit in the company's financial statements. There are two types of debentures: 1. Convertible debentures, which are convertible bonds or bonds that can be converted into equity shares of the issuing company after a predetermined period of time. "Convertibility" is a feature that corporations may add to the bonds they issue to make them more attractive to buyers. In other words, it is a special feature that a corporate bond may carry. As a result of the advantage a buyer gets from the ability to convert; convertible bonds typically have lower interest rates than non-convertible corporate bonds. 2. Non-convertible debentures, which are simply regular debentures, cannot be converted into equity shares of the liable company. They are debentures without the convertibility feature attached to them. As a result, they usually carry higher interest rates than their convertible counterparts.

Debenture stock
Definition
Stock issued under a contract to pay specified amounts at specified intervals. The name is misleading, since it's more like preferred stock than a debenture. Debenture stock is a form of investment that is somewhat like preferred stock. With a debenture stock offering, the terms and conditions that govern the stock issue include a schedule for making payments to the investor at regular intervals. From this perspective, debenture stock functions more like any type of debenture rather than like other forms of stock. One of the keys to understanding how debenture stock functions is to realize that the stock offering is treated as equity rather than debt. This is the factor that tends to make the stock more

like other forms of stock and less like a debenture. The classification of debenture stock also establishes a degree of protection for investors in the event the company shuts down and the assets of the corporation go through a liquidation process.

Debenture stock : Debenture stock, loan contract issued by a company or public body specifying an obligation to return borrowed funds and pay interest, secured by all or part of the companys property. Certificates specifying the amount of stock, with coupons for interest attached, are usually issued to the lenders. The interests of the stockholders may be protected by a trust deed naming a trustee who acts on behalf of the stockholders and against whom they actually have claim. In case of default, the debenture holder may appoint a receiver to seize and realize assets and repay the money secured.

Bonds conversion of and redemption of debentures:

Convertible bonds, often simply called converts, are usually debentures that can be converted into common stock of the corporate issuer within a specified time period at the discretion of the investor. Either the number of shares or the share price is specified in the indenture. The number of shares of stock that each bond can be converted to is known as the conversion ratio. Thus, a bond that can be converted into 10 shares of stock has a conversion ratio of 10 to 1, or simply as 10. If the share price is specified in the indenture instead of the number of shares, then the conversion ratio can be found by dividing the par value of the bond$1,000by the share price. Thus, if a share price of $20 is specified, then the conversion ratio is $1,000/$20 = 50 shares. When the bond is first issued, the conversion price is much higher than the stock price.

Redemption of debentures:
Q.1. Explain briefly the various methods of redemption of debentures. Answer: Repayment or discharge of liability on account of debentures is called redemption of debentures. The method of debenture redemption adopted determines to a very large extent, the actual accounting for redemption as well as the marshalling of resources for the same. There are broadly four methods for the redemption of debentures which are as follows:

1. Lump-sum payment method: In this method, redemption of debentures is done by repayment in one lump sum after the expiry of a stipulated period. The total amount payable to debenture holders is decided at the time of issue of debentures (i.e. debentures will be redeemed at par or at premium). Usually a company creates sinking fund or an insurance policy fund for the redemption of debentures. 2. Drawings of Lots method: In order to reduce the liability of debentures, company may repay the debentures in some instalments. A certain amount of debentures is redeemed at regular interval of time during the lifetime of the debentures by drawings of lots. 3. Purchase in the Open Market: The company from the open market can purchase its own Debentures. Debentures so purchased may be cancelled immediately or may be kept as an investment, which will be cancelled later. It may beneficial for the company if it purchases its own debentures at a discount from the open market. 4. Conversion Method: Usually debentures are redeemed in cash but sometimes debenture holder are given an option to get their debentures converted either in shares or for new debentures of the company. The redemption of debentures by means of shares or new debentures is known as redemption by conversion. Debentures, which carry such right, are called Convertible Debentures.

Redemption of debentures:
Redemption of Debentures: A company may issue redeemable as well as irredeemable debentures. But debentures issued by companies are usually redeemable debentures. There are two important ways of redeeming the debentures according to the term of the issue. Redemption of Debentures on a Fixed Date: In this method, payment to debenture holder is made at the expiry of the stated period. A "Sinking Fund" is created by debiting the "Profit & Loss Appropriation Account". The amount so credited in the sinking fund account is invested in the gilt edged securities. These securities are sold at the date of redemption of debentures. The sinking fund or debenture fund account is then transferred to the General Reserve. Some companies take up sinking fund insurance policy to redeem the debentures. Redemption of Debentures on annual installments: In this method, payment is made year after year, after a certain portion of the total debentures by drawings. As such the revenue account is debited with the annual drawings and the Redemption Fund Account are credited. Sinking Fund: It is a kind of reserve by which a provision is made to reduce a liability, e.g. redemption of debentures or repayment of a loan. A sinking fund is a form of specific reserve set aside for the redemption of a long term debt. The main purpose of creating a sinking fund is to have a certain sum of money accumulated for a future date by setting aside a certain sum of money every year. It is a kind of specific reserve.

Whatever the object or the method of creating such a reserve may be, every year certain sum of money is invested in such a way that with compound interests, the exact amount to wipe off the liability or replace the wasting asset or to meet the loss will be available. The amount to be invested every year can be known from the compound interest annuity tables. Alternatively an endowment policy may be taken out which matures on the date when the amount required will be paid by the insurance company. The advantage of this method is that a definite amount will be available, while in the case of investment of fund in securities, the exact amount may not be available on account of fall in the value of securities. After the liability is redeemed the sinking fund is no longer required as it is the undistributed profit it may be distributed to the shareholders or may be transferred to the General Reserve Account. Debenture Redemption Reserve: The newly introduced Section 117C in the Companies Act, 1956 by Companies (Amendment) Act, 2000 has made a bold step in protecting the interests of debenture holders by making it mandatory for the company to create security and debenture redemption reserve. Accordingly, it shall now be mandatory for the companies to create a debenture redemption reserve for the redemption of debentures. The company shall have to credit adequate amount from out of its profits every year till such debentures are redeemed. The debenture reserve shall be used by the company only for the redemption of debentures. Such redemption shall be in accordance with the terms and conditions of the issue of debentures. The company shall pay interest due on outstanding debentures as per the terms and conditions of the issue only. If a company fails to redeem the debenture on due dates or on maturity, any or more than one or all the debenture holders can make an application to the Tribunal and then Tribunal on hearing all the parties concerned may direct by way of an order to redeem the debentures forthwith by payment of principal and interest due on such debentures. If default is made in complying with the order of the Tribunal, every officer of the company who is in default shall be punishable with imprisonment which may extend to 3 years and shall also be liable to a fine of not less than Rs. 500 for every day during which such default continues.

A provision that was added to the Indian Companies Act of 1956 during an amendment in the year 2000. The provision states that any Indian company that issues debentures must create a debenture redemption service to protect investors against the possibility of default by the company. Investopedia Says: Under the provision, debenture redemption reserves will be funded by company profits every

year until debentures are to be redeemed. If a company does not create a reserve within 12 months of issuing the debentures, they will be required to pay 2% interest in penalty to the debenture holders. Only debentures that were issued after the amendment in 2000 are subject to the debenture redemption service.

Securing of debt:
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally lent to the borrower, for example, foreclosure of a home. From the creditor's perspective this is a category of debt in which a lender has been granted a portion of the bundle of rights to specified property. If the sale of the collateral does not raise enough money to pay off the debt, the creditor can often obtain a deficiency judgment against the borrower for the remaining amount. The opposite of secured debt/loan is unsecured debt, which is not connected to any specific piece of property and instead the creditor may only satisfy the debt against the borrower rather than the borrower's collateral and the borrower.

Purpose of securing debt:

There are two purposes for a loan secured by debt. In the first purpose, by extending the loan through securing the debt, the creditor is relieved of most of the financial risks involved because it allows the creditor to take the property in the event that the debt is not properly repaid. In exchange, this permits the second purpose where the debtors may receive loans on more favorable terms than that available for unsecured debt, or to be extended credit under circumstances when credit under terms of unsecured debt would not be extended at all. The creditor may offer a loan with attractive interest rates and repayment periods for the secured debt.

Types of securing debt:

A mortgage loan is a secured loan in which the collateral is property, such as a home. A nonrecourse loan is a secured loan where the collateral is the only security or claim the creditor has against the borrower, and the creditor has no further recourse against the borrower for any deficiency remaining after foreclosure against the property. A foreclosure is a legal process in which mortgaged property is sold to pay the debt of the defaulting borrower. A repossession is a process in which property, such as a car, is taken back by the creditor when the borrower does not make payments due on the property. Depending on the jurisdiction, it may or may not require a court order.

CHARGES
Sections 124 to 145 of the Companies Act, 1956 deal with registration of charges by companies. The subject can be conveniently divided in five topics : Filing of particulars of charge created. Filing of particulars of modification of charge. Filing of particulars of series of debentures. Filing of particulars of satisfaction of charge. Condonation of delay in filing of particulars of charges created / modified / satisfied.

CREATION OF CHARGE (Section 125)

If a charge created by the company falls within any of the classes as specified in section 125 (4), its particulars shall be filed with the Registrar of Companies Act, 1956 within 30 days of creation of charge. If particulars of charge could not be filed within 30 days, the ROC has power to extend the said period by 30 more days subject to payment of additional filing fee by the Company. Particulars of creation of charge shall be filed in Form No. 8 & 13, in 3 sets, alongwith all the papers / instruments relating to creation of charge. Form No. 8 includes the following details : Description of instrument creating the charge Amount secured Property charged Terms & conditions of charge Name & address of person entitled to charge

Registrar of Companies (ROC) will verify the particulars filed under Form No. 8 & 13 and thereafter shall register charge which is conclusive evidence of compliance with the requirements as to registration of the charge. ROC shall deliver 2 sets duly registered under seal and signature, one for lender and second for borrower.

SERIES OF DEBENTURES (Section 128)

Particulars of series of debentures, containing or giving by reference to any other instrument any charge giving pari passu (equal) benefit to the debentureholders shall be

filed with ROC within 30 days of execution of the deed containing the charge in Form No. 10 & 13 together with the supporting documents of such charge. Registration of charge by ROC as in the case of creation of charge on being satisfied of the contents. MODIFICATION OF CHARGE (Section 135) Any change in terms / conditions / extent of operation of any charge already registered tantamount to modification under Companies Act, 1956, such as : Change in rate of interest (other than bank rate), repayment period or any other material term of loan. Further charge for the same loan by way of additional security. Increase in limit. Change in nature of security in respect of charge already created.

Again Form No. 8 & 13, in 3 sets, are required to be filed with ROC within 30 days ( within 60 days with additional fee ). The said forms will include the instrument modifying the original charge.

ROC will register the same under seal and signature and will deliver 2 sets of modifications, one for lender and second for borrower. SATISFACTION OF CHARGE (Section 138) On satisfaction of charge in full an intimation thereof shall be given to ROC within 30 days of satisfaction of the charge by filing Form No. 17 & 13 together with a letter or certificate given by the charge holder confirming that the charge has been satisfied in full. ROC will register Form No. 17 & 13 regarding satisfaction of charge and will deliver 2 sets of satisfaction, one for lender and second for borrower. Please note that in this case no grace period is allowed under the Companies Act, 1956 unlike creation and modification. PETITION TO CLB FOR CONDONATION OF DELAY / RECTIFICATION OF CHARGE (Sec. 141)

If for any reason charge ( creation or modification ) could not be filed with ROC within 60 days ( 30 days under law + 30 days with additional fee under ROC power ) and in case of satisfaction 30 days, then the Company have to take the condonation of delay in filing such particulars with Company Law Board. In case of rectification / corrections required in a registered charge, the same can be done only with the order of Company Law Board under this section.

The condonation petition under section 141 include the following : Petition containing details about company, charge delayed and reason thereof. Affidavit verifying the petition. Board Resolution authorising director to make affidavit. Memorandum of Appearance by professional appearing on behalf of the company.

The Company Law Board on hearing of the case or otherwise decide about the genuinity of the case on the ground of just and equitable will levy cost for such delay and condone the delay / rectification by issuing order in this behalf. The Company will file the copy of order alongwith Form No. 21 with ROC and get the registration in this behalf. PENALTY FOR CONTRAVENTION (Section 142) If default is made in filing of any charge created by the company or of the payment or satisfaction of a debt in respect of which a charge has been registered or of the issues of debentures of a series, requiring registration then, unless the registration has been effected on the application of some other person, the company, and every officer of the company or other person who is in default shall be punishable with fine which may extend to Rs.5000/for every day during which the default continues. In case of default in compliance of any of the other requirements of this act, the company, and every officer of the company who is in default, shall, without prejudice to any other liability, be punishable with fine which may extend to Rs.10000/-. ENTRIES IN THE REGISTER OF CHARGES (Section 143) Every company shall keep register of charges and enter therein all charges specifically affecting property of the company, giving the details of :

Date of charge Property charged Amount of charge Charge holder

In case of default in compliance with the said section, any officer who knowingly omits or wilfully authorises or permits the omission, shall be punishable with fine which may extend to Rs.5000/-.

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