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FAQs on Debentures
 

1. What is a “Debenture”?

A debenture can be defined as a debt instrument (basically a bond) issued by a company with an obligation to repay the amount at a specified rate of interest. In its broadest meaning it is a certificate of debt or a fixed income bond. It is one of the methods of raising capital of a company.

A debenture is an acknowledgement of debt issued by a company acknowledging its obligation to repay the sum at a specified rate and also carrying an interest. It is one of the methods of raising the loan capital of the company. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital.

2. Who is a Debenture Trustee?

A Debenture Trustee is a trustee of a Trust Deed for securing any issue of debentures of a body corporate

3. Who can be appointed a Debenture Trustee?

To act as debenture trustee, the entity should be registered with SEBI to act as a debenture trustee.

4. Can a Debenture be transferred?

Yes, debentures are transferable.

5. What is the role of Debenture Trustee with respect to creation orenforcing the security in a debenture issue?

Creation of security means mortgaging the property in favor of Debenture Trustee for the benefit of debenture-holders. This is an incidence of ownership of property and creation of security has to be done by the owner of the property. However, the debenture-holders are beneficiaries and they have no access to mortgaged property. The Debenture Trustee holds the secured property on behalf of Issuer Company and for benefit of debenture-holders. In the event of default by the issuer company, the Debenture Trustee will have the power and authority to bring the secured property to sale following the procedure under laws, and the proceeds of sale will have to be applied to redeem the debentures. It needs to be noted that Debenture Trustee is neither a guarantor nor a surety for the issuer or investor.

6. Is appointment of Debenture Trustee compulsory?

As per the provisions of Companies Act, appointment of Debenture Trustee is mandatory. However, issues of debentures/bonds with maturity of 18 months or less are exempt from the requirement of appointment of Trustee.


 
 
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