{"id":10450,"date":"2020-05-08T11:57:01","date_gmt":"2020-05-08T06:27:01","guid":{"rendered":"https:\/\/swaritadvisors.com\/learning\/?p=10450"},"modified":"2020-11-24T17:15:36","modified_gmt":"2020-11-24T11:45:36","slug":"an-analysis-of-debentures-issued-as-collateral-security","status":"publish","type":"post","link":"https:\/\/swaritadvisors.com\/learning\/an-analysis-of-debentures-issued-as-collateral-security\/","title":{"rendered":"An Analysis of Debentures issued as Collateral Security"},"content":{"rendered":"\n<p class=\"has-drop-cap\">Insufficient funds are imperative for any business, whether small or large. Several companies either issue debentures to the public in exchange for money or takes loans from banks by issuing debentures as collateral security. Collateral security implies the supporting security for a credit, which can be realized by the creditor if there is any default in repayment of the original loan. A company\u2019s <strong><a href=\"https:\/\/swaritadvisors.com\/issue-of-debentures\" class=\"text-primary\">debentures issued<\/a><\/strong> as collateral security is a secondary security for the original loan taken. Banks can realize the collateral security or debenture\u2019s amount in this case, if the company fails to repay the original loan. This write-up will act as a complete guide about issuing debentures as collateral security and accounting treatment. <\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a3a330cd7c1a\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a3a330cd7c1a\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/swaritadvisors.com\/learning\/an-analysis-of-debentures-issued-as-collateral-security\/#An_overview_of_Debentures\" title=\"An overview of Debentures \">An overview of Debentures <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/swaritadvisors.com\/learning\/an-analysis-of-debentures-issued-as-collateral-security\/#Salient_Features_of_Debentures\" title=\"Salient Features of Debentures \">Salient Features of Debentures <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/swaritadvisors.com\/learning\/an-analysis-of-debentures-issued-as-collateral-security\/#Debentures_issued_as_Collateral_Security_for_Loans\" title=\"Debentures issued as Collateral Security for Loans\">Debentures issued as Collateral Security for Loans<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/swaritadvisors.com\/learning\/an-analysis-of-debentures-issued-as-collateral-security\/#Accounting_Treatment_for_the_Debentures_issued_as_Collateral_Security\" title=\"Accounting Treatment for the Debentures issued as\nCollateral Security \">Accounting Treatment for the Debentures issued as\nCollateral Security <\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/swaritadvisors.com\/learning\/an-analysis-of-debentures-issued-as-collateral-security\/#Balance_Sheet_Extract\" title=\"Balance Sheet (Extract)\">Balance Sheet (Extract)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/swaritadvisors.com\/learning\/an-analysis-of-debentures-issued-as-collateral-security\/#Journal_Entry\" title=\"Journal Entry\">Journal Entry<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/swaritadvisors.com\/learning\/an-analysis-of-debentures-issued-as-collateral-security\/#Types_of_Debentures_based_on_Security\" title=\"Types of Debentures based on Security \">Types of Debentures based on Security <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/swaritadvisors.com\/learning\/an-analysis-of-debentures-issued-as-collateral-security\/#What_are_the_conditions_for_issuing_Secured_Debentures\" title=\"What are the conditions for issuing Secured Debentures?\">What are the conditions for issuing Secured Debentures?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/swaritadvisors.com\/learning\/an-analysis-of-debentures-issued-as-collateral-security\/#Advantages_of_issuing_Debentures\" title=\"Advantages of issuing Debentures\">Advantages of issuing Debentures<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/swaritadvisors.com\/learning\/an-analysis-of-debentures-issued-as-collateral-security\/#Advantages_of_issuing_Debentures_from_Investors_point_of_view\" title=\"Advantages of issuing Debentures from Investors\npoint of view:\">Advantages of issuing Debentures from Investors\npoint of view:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/swaritadvisors.com\/learning\/an-analysis-of-debentures-issued-as-collateral-security\/#Conclusion\" title=\"Conclusion&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; \">Conclusion&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"An_overview_of_Debentures\"><\/span>An overview of Debentures <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Debentures, in simple terms, refer to a\ndebt instrument that is raised to meet the long-term capital needs. In case of\ndebts, a debenture has two fundamental features of periodic payment of interests\nand repayment of the loan at a specified point of time.<\/p>\n\n\n\n<p>Debentures include bonds, stocks, and other\nsecurities of a company. It is the type of document which acknowledges the\nborrowed money or loan. It outlines all the terms and conditions of the loan, redemption\nof the loan, payment of interest, securities offered by the company. <\/p>\n\n\n\n<p>The debentures are also considered as a long-term source of finance. It is a form of <strong>long-term loan<\/strong> or bond which is issued by the company that incurs from a shortage of capital. \u00a0The debenture usually carries a fixed rate of interest throughout a loan. <\/p>\n\n\n\n<p>For investors, the debenture is a secure\nmode of investing in a company than investing in shares as the companies have\nto pay interest. Besides, the debentures issued as collateral security ensures\nthe investment even in case of default payments. However, the debenture holders\ndo not have any share in the company itself.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Salient_Features_of_Debentures\"><\/span>Salient Features of Debentures <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em>Following are some fundamental characteristics of debentures that make them a suitable form of long-term borrowing for the companies:<\/em><\/p>\n\n\n\n<ul><li>Debentures are the debt instruments,\nand the person who holds them becomes the creditor of the company.<\/li><li>A debenture is the certificate\nof debt that entails the details like amount of repayment, interest to be paid,\nand date of redemption. This certificate is issued under the Company Seal.<\/li><li>Debentures are issued on a\nfixed rate of interest that is payable either half-yearly or annually.<\/li><li>As the debenture holders are\nthe creditors of the company and not owners, so they don\u2019t get any right to\nvote in the company\u2019s general meeting. However, the debenture holders may leverage\nseparate rights in regards to changes in debentures.<\/li><li>The interest paid on debentures\nis charged against the profit of the company. Hence, companies are legally\nobliged to pay the interest on due dates irrespective of their level of\nearnings.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Debentures_issued_as_Collateral_Security_for_Loans\"><\/span>Debentures issued as Collateral Security for Loans<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In general, the collateral security or\nsecondary security is a security that can be realized by the party holding it,\nif the loan amount is not paid at the stipulated time or as per agreement\nsealed between the parties. <\/p>\n\n\n\n<p>When a company or borrower issues debentures\nas collateral security for the loan, the nominal value of such debentures is\nalways more than the lending amount. The debentures issued as collateral security\nare automatically redeemed by the company when it pays off the loan taken.<\/p>\n\n\n\n<p>If a company takes a loan or borrow some money, then it needs to provide a document to its creditor which will act as evidence for the terms of the loan. This document is called a debenture.<\/p>\n\n\n\n<p>The debenture specifies a capital sum\nborrowed, which is repayable at a prescribed future date.<\/p>\n\n\n\n<p>During the period of loan taken, the\ncompany has to pay a fixed interest to the creditor. Often creditors take\ncharge over some or all assets of the concerned company to improve the chance\nof recovering the debt in case the company becomes insolvent.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Accounting_Treatment_for_the_Debentures_issued_as_Collateral_Security\"><\/span>Accounting Treatment for the Debentures issued as\nCollateral Security <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>There are two methods of issuing debentures\nas collateral security stated in the accounting books:<\/p>\n\n\n\n<ul><li>First Method- In this method,\nthe companies do not make any journal entry in the account books during of\nissue of the debentures. Besides, the company appends a note below the loan on\nthe liabilities side of the balance sheet. It indicates that the loan has been\nsecured by the issue of debentures. Such note shall be represented in the\nbalance sheet, as shown below: <\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Balance_Sheet_Extract\"><\/span><strong>Balance Sheet (Extract)<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter is-resized\"><img decoding=\"async\" loading=\"lazy\" src=\"https:\/\/swaritadvisors.com\/learning\/wp-content\/uploads\/2020\/05\/Balance-Sheet.png\" alt=\"BALANCE SHEET\" class=\"wp-image-10452\" width=\"599\" height=\"186\" srcset=\"https:\/\/swaritadvisors.com\/learning\/wp-content\/uploads\/2020\/05\/Balance-Sheet.png 580w, https:\/\/swaritadvisors.com\/learning\/wp-content\/uploads\/2020\/05\/Balance-Sheet-300x93.png 300w\" sizes=\"(max-width: 599px) 100vw, 599px\" \/><\/figure><\/div>\n\n\n\n<ul><li><strong>Second Method- <\/strong>In the other method, the debentures issued as collateral security is recorded by making the following journal entry:<\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Journal_Entry\"><\/span>Journal Entry<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter is-resized\"><img decoding=\"async\" loading=\"lazy\" src=\"https:\/\/swaritadvisors.com\/learning\/wp-content\/uploads\/2020\/05\/journal.png\" alt=\"JOURNAL\" class=\"wp-image-10453\" width=\"595\" height=\"199\" srcset=\"https:\/\/swaritadvisors.com\/learning\/wp-content\/uploads\/2020\/05\/journal.png 601w, https:\/\/swaritadvisors.com\/learning\/wp-content\/uploads\/2020\/05\/journal-300x100.png 300w\" sizes=\"(max-width: 595px) 100vw, 595px\" \/><\/figure><\/div>\n\n\n\n<p>The Debentures Suspense Account shall appear\non the assets side of the balance sheet while the Debentures will be on the\nliabilities side. Once the company repays the loan, this entry will get reversed\nin order to cancel it.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Types_of_Debentures_based_on_Security\"><\/span>Types of Debentures based on Security <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>There are two <strong><a href=\"https:\/\/swaritadvisors.com\/learning\/different-types-of-debentures\/\" class=\"text-primary\">forms of debentures<\/a><\/strong> which are classified on the basis of security: <\/p>\n\n\n\n<ul><li><strong>Secured Debentures- <\/strong>This type of&nbsp;debentures\nare secured fully or partially&nbsp;by a charge over the fixed assets of the\nissuer company. When the company fails to pay the principal or interest amount,\nits assets can be sold to repay the liability to the investors.<\/li><\/ul>\n\n\n\n<ul><li><strong>Unsecured Debentures or Naked Debentures<\/strong>&#8211;\nUnlike the secured debentures, unsecured debentures are not supported by a\ncollateral security. Therefore, no particular assets of the company shall be set\naside against the unsecured debentures. Basically, it is a loan without any\nprotection and is backed only by the creditworthiness of the issuer company.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_are_the_conditions_for_issuing_Secured_Debentures\"><\/span>What are the conditions for issuing Secured Debentures?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Here is the list of prerequisites that a\ncompany must meet before issuing secured debentures: <\/p>\n\n\n\n<ul><li>The company must issue secured debentures with the date of the redemption\nless than 10 years from the date of issue.<\/li><li>Secured debentures shall be issued by creating a charge.<\/li><li>The company must appoint a debenture trustee and execute the debenture\ntrust deed before the issue of prospectus.<\/li><li>The charge created must be in favor of a debenture trustee.<\/li><li>Debenture trust deed needs to be in format SH-12. <\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Advantages_of_issuing_Debentures\"><\/span>Advantages of issuing Debentures<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Issue of debentures serves various benefits\nto the company as well as to the investors. Let\u2019s look at some of its\nadvantages:<\/p>\n\n\n\n<ul><li>Debentures cater to the long-term\nfunds needs of the company.<\/li><li>The rate of interest payable on\ndebentures lower as compared to the rate of dividend paid on shares.<\/li><li>&nbsp;The interest imposed on debentures is a\ntax-deductible expense, thus the effective cost of (debt-capital) debentures is\nmuch lower than the ownership securities wherein dividend is not a\ntax-deductible expense.<\/li><li>Debt financing through debentures does not result in the dilution of\ncontrol as the debenture holders are deprived of any voting rights.<\/li><li>The companies can trade on equity\nby mixing debentures in their capital structure, thereby, increase their earnings\nper share.<\/li><li>Many companies prefer to issue debentures\nbecause of the fixed rate of interest associated with them irrespective of any changes\nin the price levels.<\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Advantages_of_issuing_Debentures_from_Investors_point_of_view\"><\/span><strong>Advantages of issuing Debentures from Investors\npoint of view:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<ul><li>Issue of debentures provide a regular, stable, and fixed source of income to the investors.<\/li><li>Numerous investors choose debentures because of a definite maturity period.<\/li><li>The debentures issued as collateral security are comparatively a safer investment. Since the debenture holders levy a specific or floating charge on the assets of the issuer company, so they avail the superior power in the case of the company\u2019s liquidation.<\/li><li>The debenture is a more liquid investment and allows investors to mortgage or sell his\/her instrument to acquire loans from the financial institutions.<\/li><li>The interest of debenture holders is protected by stringent provisions under the debenture trust deed and guidelines issued by the (SEBI) Securities and Exchange Board of India.<\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; <span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Debentures are certainty a robust debt\ninstrument for the companies. It creates a win-win situation for both the\nlenders and borrowers. The debentures issued as collateral security helps the\nbank to gain authority during the insolvency of the issuer company. <\/p>\n\n\n\n<p>If you also want to issue debenture to\nraise capital for your company, take legal assistance from Swarit Advisors. Our\nlegal experts will help you set terms of issuance and prepare the essential\ndocuments needed for the issue of debentures. <\/p>\n\n\n\n<p><b>Also, Read:<\/b> <mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/swaritadvisors.com\/learning\/how-a-company-issue-debentures-to-public\/\">How a Company Issue Debentures to Public?<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Insufficient funds are imperative for any business, whether small or large. Several companies either issue debentures to the public in exchange for money or takes loans from banks by issuing debentures as collateral security. Collateral security implies the supporting security for a credit, which can be realized by the creditor if there is any default [&hellip;]<\/p>\n","protected":false},"author":10,"featured_media":10456,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[627],"tags":[626],"_links":{"self":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/10450"}],"collection":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/users\/10"}],"replies":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/comments?post=10450"}],"version-history":[{"count":14,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/10450\/revisions"}],"predecessor-version":[{"id":16637,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/10450\/revisions\/16637"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media\/10456"}],"wp:attachment":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media?parent=10450"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/categories?post=10450"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/tags?post=10450"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}