23 Feb Understanding Debentures According to the Companies Act of 2013
When a company seeks to raise funds without diluting its equity, it often opts for issuing debentures, which represent a form of debt for the company. Comparable to borrowing money, debentures necessitate repayment over a predetermined period, typically with a fixed interest rate. Both corporate entities and governmental bodies frequently utilize debentures as a means to procure funds or capital. This article provides an in-depth exploration of debentures as outlined in the Companies Act of 2013.
Definition of Debentures: Debentures serve as financial instruments facilitating capital acquisition for businesses in the market, enabling them to expand their operations. Originating from the Latin word “debere,” meaning “to borrow,” debentures essentially represent an acknowledgment of a loan extended by a company to a third party under its corporate banner. As per Section 2(30) of the Companies Act of 2013, debentures encompass loans issued by a company as evidence of debt incurred, whether secured against company assets or not.
Characteristics of Debentures:
- Issued for Cash: Typically, debentures are issued to procure funds for the company, often through cash transactions, which may involve rates, discounts, or premiums.
- Collateralized Debentures: Some debentures are issued with collateral, serving as additional security for loans obtained by the company, safeguarding creditors' interests in the event of default.
- Non-Cash Consideration: Alternatively, companies may issue debentures as a non-cash consideration, particularly when acquiring goods, equipment, or other assets, thereby deferring cash payments to a later date.
Types of Debentures:
- Secured/Unsecured Debentures: Debentures may be secured by company assets, or unsecured, also known as nominal collateral debentures.
- Convertible/Non-Convertible Debentures: Debentures can be convertible into equity shares under specified conditions or remain non-convertible, as per the terms outlined in the Debenture Trust Deed.
- Redeemable/Irredeemable Debentures: Redeemable debentures are repayable upon maturity, whereas irredeemable debentures do not have a redemption provision, with only interest payments until cancellation or redemption by the company.
Utilization of Debentures: Companies issue debentures to raise capital, which is then allocated towards research, development, and business expansion. Debt financing, through debentures, is favored over equity issuance due to its non-dilutive effect on corporate ownership and the relatively lower cost of raising debt capital compared to equity.
Debenture Redemption:
- Conducting Board Meetings for Debenture Redemption
- Notifying Creditors Regarding Redemption
- Liaising with Banks for Repayment
- Updating Debenture and Credit Registers
- Seeking Shareholder Approval for Compulsory or Convertible Debenture Redemption, if required.
Conclusion: In conclusion, understanding debentures under the Companies Act of 2013 is crucial for businesses and investors alike. The issuance of debentures aligns with the financial needs of companies and preferences of investors, ensuring flexibility and security within the capital market framework. Whether through secured transactions or non-cash considerations, debentures play a pivotal role in facilitating capital growth and corporate development while safeguarding investor interests.
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