Debentures issued as a collateral security


A debenture is a bond issued by a company under its seal, acknowledging a debt and containing provisions as regards repayment of the principal and interest.

Under section 71 (1) of the Companies Act 2013, a company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption. Provided that the issue of debentures with an option to convert such debentures into shares, wholly or partly, shall be approved by a special resolution passed at a duly convened general meeting. Section 71 (2) further provides that no company can issue any debentures which carry any voting rights.

Section 71 (4) provides that where debentures are issued by a company under this section, the company shall create a debenture redemption reserve account out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilized by the company for any purpose other than the redemption of debentures.

Debentures issued as a collateral security:

A collateral security may be defined as  additional security in addition to some principal security. When a limited company obtains a loan from bank or any other financial institutions, it may pledge some assets as a security against the said loan.

But the lending institution may insist on some more assets as collateral security so that the amount of loan can be realized in full with the help of collateral security. In such case company may issue its debentures as collateral security.

The collateral security will not be used or realized as long as company fulfills its obligation regarding payment of interest when due and repayment of loan on the maturity date. If the amount realized from sale of principal security falls short of the loan money, then loan of lending institution converted into debentures of the company and lending institution claims all the right of being a debentureholders. 

Debentures issued as collateral security will be realized by the lender only in case the loan is not repaid on the due date.

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