INTRODUCTION:
In law, a debenture is a document that either creates a debt or acknowledges it. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note. Debentures are generally freely transferable by the debenture holder. Debenture holders have no rights to vote in the company’s general meetings of shareholders, but they may have separate meetings or votes e.g. on changes to the rights attached to the debentures. The interest paid to them is a charge against profit in the company’s financial statements.1
Convertible debentures, which are convertible bonds or bonds that can be converted into equity shares of the issuing company after a predetermined period of time. “Convertibility” is a feature that corporations may add to the bonds they issue to make them more attractive to buyers. In other words, it is a special feature that a corporate bond may carry. As a result of the advantage a buyer gets from the ability to convert; convertible bonds typically have lower interest rates than non-convertible corporate bonds.2
Non-convertible debentures, which are simply regular debentures, cannot be converted into equity shares of the liable company. They are debentures without the convertibility feature attached to them. As a result, they usually carry higher interest rates than their convertible counterparts.
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1. Glossary: D on the Financial Industry Regulatory Authority (FINRA) website, United States
2. What is a debenture?, Company Law Club, referring to United Kingdom usage
TYPES:
Bearer debenture:
These debentures also known as unregistered debentures, are payable to its bearer. These are regarded as negotiable instruments and are transferable by delivery.
Registered debentures:
These are the debentures which are payable to the register holders. These are transferable in the manner specified in the conditions endorsed thereon.
Secured debentures:
Debentures which create some charge on the property of the company. The charge may be a fixed charge or a floating charge.
Unsecured or naked debenture:
Debentures which do not create any charge on the assets of the company. The holders of these debentures like ordinary unsecured creditors may sue the company for recovery of the debt.
Redeemable debentures:
Debentures are usually issued on the condition that they shall be redeemed after a certain period. They may be re-issued after redemption in accordance with the provisions of section.
Irredeemable debentures:
A debenture will be treated as irredeemable where either there is no period fixed for repayment of the principal amount or repayment of it is made conditional on the happening of an event which may not happen for an indefinite period or may happen only in certain specified and contingent events.
Convertibility debentures:
These debentures give an option to the holders to convert them into preference or equity shares at stated rates of exchange, after a certain period. If the holders exercise the right of conversion, they cease to be lenders to the company and become members instead
Non-convertible debentures:
These debentures do not give any option to their holders to convert them equity shares. They are to be duly paid as and when they are mature.
Priority classification:
First debentures: These are the debentures which are to be repaid in priority to other debentures which may be subsequently issued.
Second debentures: These are the debentures which are to be paid after the “first Debentures” have been redeemed.
Debenture with pari passu clause:
Debentures are usually issued in a series with a pari passu clause. In such a case they are to be discharged ratable, though issued at different and varying times. In the event of a deficiency of assets to satisfy the whole debt secured by the issue of debentures, they will abate proportionately.
It does not include:
(a) a document that merely acknowledges the receipt of money by a corporation where in respect of the money, the corporation issues in compliance with section 97 of the Companies (New South Wales) Code a document prescribed by section 97 (2) of that Code and complies with the other requirements of section 97 of that Code,
(b) an order for the payment of money,
(c) a bill of exchange or promissory note,
(d) a document that merely evidences or acknowledges a debt owing by a bank or, within the meaning of Division 29, the short-term liability of a short-term dealer,
(e) a document, not being an acknowledgement of indebtedness of a corporation in respect of money that is deposited with or lent to the corporation, that does not create a debt or
(f) a document that merely evidences or acknowledges the receipt of money by a prescribed person within the meaning of the definition of that expression in this subsection, if the money is deposited with, or lent to, the prescribed person otherwise than:
(i) in the course of a business of lending money not limited to depositing money with, or lending money to, the prescribed person,
(ii) In response to an invitation to the public to deposit or lend money within a specified period.3
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3.According to sec.2(12) ‘debenture’ includes debenture stocks, bonds and any other securities of a company whether constituting a charge on the assets of the company or not.
The most usual form of borrowing by a company is by the issue of debentures.
‘Debenture’ means a document which either creates a debt or acknowledges it, and any document which fulfills either of these conditions is a debenture.
It is issued by a company and is usually in the form of a certificate which is an Acknowledgement of indebtedness; it is issued under the company’s seal. It need not, however, be necessarily under the company’s seal.
? It usually specifies a particular period or date as the date of repayment
? It generally creates a charge on the undertaking of the company or some parts of its property; but there may be debentures without any such charge.
? A debenture holder does not have any right to vote in the company.4
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4. Chandra Gopalan (2007); Company Law in Singapore 3rd Edition; McGraw-Hill Education (Asia)
The Companies Act lays down the following rules regarding debentures:
1. No debenture holder is to have any voting rights in company meetings.
2. If there is a trust deed securing the issue of debentures, every debenture holder can have a copy of it on payment of a small fee.
3. The trustees in a trust deed securing the issue of debentures must exercise due care and diligence in the performance of their duties. Any provision in the deed exempting them from liability on this account is void.
4. Debenture may be irredeemable, or redeemable on the happening of a contingency.
5. Redeemable debentures can be reissued unless there is any provision to the contrary.
6. An agreement to take a debenture can be specifically enforced.
7. Debts of the company, which by the Act receive preferential payment in case of winding up, shall have priority over the claims of the debenture holders.
8. Full particulars regarding the issue of debentures in series must be sent to the Registrar.
9. There are certain limits on the amount of commission and brokerage that can be paid for the sale of debentures.
10. Transfer of Debentures.
11. Register and Index of Debenture Holders.
Investors holding Geneva Finance subordinated notes and debentures will have to decide at the end of the month whether to swap them into shares in the finance company. Note holders and shareholders will vote at a meeting on March 31 on the conversion of the subordinated notes into shares at 5c per share.
The meeting will also vote on whether debenture holders can convert their scheduled March 2015 debenture principal repayment into shares at the same price. The conversion rate was a 14 percent discount on the four-month average market price of the shares. Investors could exchange all or part of their investments above a minimum of $50. The offer was voluntary, the company said in a prospectus to investors.
Geneva Finance would acquire $4.44 million in extra equity, and a saving in interest payments of $587,000 per annum. Up to 88.7 million new shares would be issued to note holders, and 97.4 million new shares to debenture holders.
There were currently 80.5 million shares on issue. Geneva said the plan would improve the company’s equity position. However, there was no guarantee about the price the new shares would receive on the market if investors sold them, as opposed to the regular returns of interest payments on the notes and debentures.
A total of 798,350 shares in Geneva had traded on the NZAX in the last four months, although there were no sales at all in January and only 10,000 shares traded in December. If investors voted against the proposal, directors would decide whether the company would continue to trade, whether it was possible to wind it down, or whether to appoint a receiver. An independent report advised that a no vote was likely to result in receivership.
The subordinated notes were issued by Geneva under the 2005 unsecured trust deed, and the debentures were issued in March 2010. Geneva froze its payments in November 2007, owing $142m to its 3000 investors who have agreed to two capital reconstructions to keep the company from receivers.
Investors will also vote on restructuring the business, renaming Geneva Finance as GFG Ltd, a holding company, and transferring its assets to subsidiaries. The move aimed to make clear how the business operations were performing.
CONCLUSION:
Debentures are corporate bonds that are NOT secured by any assets or line of income. This article said the opposite that debentures are debt that IS secured by assets. This is wrong! Well, I just changed it, but I’m surprised that the mistake went unnoticed for so long! ask123 (talk) 15:02, 23 June 2009 (UTC) Debenture includes debenture stock, bonds, notes and any other document evidencing or acknowledging a debt owed by a corporation in respect of money that is, or may be, deposited with, or lent to, the corporation, whether or not payment of the debt is secured by a charge on property of the corporation.
Bibliography:
• Glossary: D on the Financial Industry Regulatory Authority (FINRA) website, United States.
• What is a debenture?, Company Law Club, referring to United Kingdom usage Chandra Gopalan (2007); Company Law in Singapore 3rd Edition; McGraw-Hill Education (Asia).
• Chandra Gopalan (2007); Company Law in Singapore 3rd Edition; McGraw-Hill Education (Asia).
• According to sec.2(12) ‘debenture’ includes debenture stocks, bonds and any other securities of a company whether constituting a charge on the assets of the company or not.
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