Chapter 2 Issue and Redemption of Debentures Solutions
Question - 1 : - What is meant by a Debenture?
Answer - 1 : -
Debenture is derived from the Latin word “debere” which translates to borrow. Debentures are not backed by any collaterals. These are issued by governments and corporations to raise funds or capital for long term borrowing.
Question - 2 : - What does a Bearer Debenture mean?
Answer - 2 : -
When records are not maintained for debenture and holders and the debenture can be transferred by delivery, such debentures are known as Bearer Debenture. These debentures are issued physically on paper and are payable to bearer of the debenture. These are also called as unregistered debentures.
Question - 3 : - State the meaning of ‘Debentures issued as a Collateral Security’.
Answer - 3 : -
Collateral security refers to an additional layer of security over and above the primary security. It is seen in case of company taking a loan from a financial institution, in such cases, company issues debentures which are additional security or collateral security. The money lender will not be receiving any interest on these debentures. In case the company defaults in making payment and the primary security is not sufficient to cover the debt, then debentures can be used for recovering the amount.
Question - 4 : - What is meant by ‘Issue of debentures for Consideration other than Cash’?
Answer - 4 : -
A company purchases any asset from its vendors or suppliers and issues debentures to them instead of paying in cash. This process is known as issue of debenture for consideration other than cash. It helps both the seller and purchaser as the seller gets interest on debentures issued and the purchaser do not need to arrange cash immediately. Debentures are issued at par, premium or at a discounted rate to the seller.
Question - 5 : - What is meant by ‘Issue of debenture at discount and redeemable at premium?
Answer - 5 : -
It may happen that due to challenging market conditions a company has to raise funds from market by issuing debenture below its par value and to attract investor interest has to offer redeemable value higher than its par value, this is termed as issue of debenture at discount and redeemable at premium. The difference that is generated due to such arrangement is treated as loss on issue of debenture.
Question - 6 : - What is ‘Capital Reserve’?
Answer - 6 : -
The reserve that is created from the capital profits is called as Capital Reserve, these are profits that is obtained from activities that are different than the normal business activities. Examples of such activities are: profit obtained from reissuing of debentures, premium on issue of share and debenture, profit redemption on debenture, profits obtained from sale of fixed asset etc. These can be used to issue bonus shares but cannot be used for paying dividend. The capital reserve is used to meet future capital losses.
Question - 7 : - What is meant by an ‘Irredeemable Debenture’?
Answer - 7 : -
Debentures that are not redeemable by a company during its life time are called irredeemable debentures. These debentures are only payable at the time of winding up of the company. Also called as perpetual debentures because of indefinite life span. These type of debentures are not issued in India.
Question - 8 : - What is a ‘Convertible Debenture’?
Answer - 8 : -
Debentures that can be converted to equity shares after a specified time is called as Convertible Debenture. The time at which it can be converted to equity shares is mentioned when the debentures are issued. There are two types:
1. Partly convertible debentures: In this only a part of debenture is eligible to be converted into equity shares.
2. Fully convertible debentures: In this all of the debenture can convert to equity shares.
Question - 9 : - What is meant by ‘Mortgaged Debentures’?
Answer - 9 : -
Debentures that are secured against the asset/assets of a company are called as Mortgaged debentures. These are also called as secure debentures. There are two types:
1. Fixed Charge: Debentures secured against a specific asset or the firm of the computer
2. Floating Charge: Debentures secured against all assets of a company
Question - 10 : - What is discount on issue of debentures?
Answer - 10 : -
Debentures which are issued at a value less than its face value (nominal value) is said to be issued at discount. There is no restriction on companies for issuing debentures on discount.