Presentation on theme: "Recap Borrowing powers of a company Modes of borrowing – Short term borrowing – Long Term borrowing Restrictions on Borrowing Ultra Vires Borrowing – Borrowing."— Presentation transcript:
Recap Borrowing powers of a company Modes of borrowing – Short term borrowing – Long Term borrowing Restrictions on Borrowing Ultra Vires Borrowing – Borrowing Ultra Vires the company – Borrowing Ultra Vires the Director
Debentures Debenture is a document issued by the company as an evidence of its debt. It is a security issued to the investors under the seal of the company. It contains a contract for the repayment of debt and the interest thereon at a specified rate.
Debentures Companies Ordinance Defines it as [Section 2(1)(12)]: “Debenture” includes debenture stocks, bonds, Term Finance Certificate and any other securities, other than a share of a company whether consisting a charge on the assets of the company or not. Thus debenture means any security (excluding the shares) issued by the company against amount received by it as loan. Such securities may or may not constitute a charge against the assets of the company.
Features of Debentures Debenture is a type of debt instrument issued to anyone who lend money to a company for a specified term and interest rate. In general, debentures have the following important features: 1) Debenture holders are not the owners of the company. They are considered the creditors of the corporation or in other words, the company borrow money from them through issuing debenture. 2) No voting rights. The debenture-holder is not a shareholder and cannot vote in the company's general meetings.
Features of Debentures 3) Fixed rate of interest. A debenture with a fixed charge has a fixed rate of interest. It can be presented as "10% Debenture". They are always unsecured and earns a fixed rate of interest but has no share of the profit. 4) Compulsory payment of interest. The interest on debenture is payable irrespective of whether there are profits made or not.
Advantages and Disadvantages of Debentures The Advantages of Debentures are as follows: 1) The holders of the debentures are entitled to a fixed rate of interest. 2) Debentures are for those who want a safe and secure income as they are guaranteed payments with high interest rates. 3) They have priority over other unsecured creditors when it comes to debt repayment.
The Disadvantages of Debentures The Disadvantages of Debentures are: 1 ) Unlike ordinary shares, debenture holders are not considered the owners of the company. They are long term loan capital and holders will have no right to vote at the annual general meeting. 2) Debentures are more secure than stocks, but will lead to a lower rate of theoretical return. 3) It is a type of debt instrument which is not secured by collateral (or physical asset). In case of bankruptcy, the bond holders are given priority over the debenture holders
Difference between Debenture and bond Debenture and bonds are similar except for one difference- bonds are more secure than debentures. A debenture is an unsecured loan you offer to a company. The company does not give any collateral for the debenture but pays a higher rate of interest to its creditors and bondholders are paid low interest. In case of bankruptcy or financial difficulties, the debenture holders are paid later than bondholders. In general terms bondholders are secured by access to the underlying asset in case of default by the issuer. Debentures, on the other hand, are unsecured, and debenture holders do not have recourse to assets in the case of default by the debenture issuer
Kinds of Debentures Ordinary Debentures The debentures which are issued without any security for repayment are called ordinary debentures. Redeemable debentures The debentures which are repayable either at a particular time or on the happening or non happening of an event or after an indefinite period are known as redeemable debentures. These are the Debentures which have to be repaid within a certain specified period. Eg: 5% 2 years Rs. 1000 debenture means redeemable. period is 2 years(5%:interest/coupon payment). After redemption, they can be reissued.
Secured/Mortgage Debentures: Debentures secured against assets of the company.i.e. if the company is winding up, assets will be sold and debenture holders will be paid back. The charge/mortgage may be fixed or a floating charge. If it is fixed, charge is on a specific asset say plant, machinery etc. If it is floating charge, it means it is on general assets of the company. Which assets are charged: The ones available with the company presently and also assets in future Mortgage deed: Includes nature/value of the security, date of interest payment, and rate of interest, repayment terms, and rights of the debenture holders if the company defaults. In the event of default of company to pay interest or principal installment, they can recover their money via the assets mortgaged.
Kinds of Debentures Bearer Debentures The debentures which don not specify the name of the owner are called bearer debentures. Any holder of such debenture is entitled to receive interest on due dates. These can be transferred by mere delivery. Company does not hold records for the debenture holder. Interest will be paid to the one who displays the interest coupon attached to the debenture.
Irredeemable Debentures Irredeemable Debentures The debenture which are not payable during the life time of the company which is issued. Irredeemable Debenture is a very common concept in investments. Irredeemable Debenture is a bond which is issued by the Government which does not have a date for expiring or maturity. – To be more specific, Irredeemable Debenture gives interest but will not be able to redeem at the face value. Irredeemable Debenture is payable when the company will be closed or at the time of winding up of the company. – Irredeemable Debenture benefit is that, in this kind of debentures money will be held safe with the government and the full amount will be repaid back.
Characteristics of irredeemable Debentures 1. Irredeemable Debentures must be in written format. An oral contract cannot be called as an irredeemable debenture. 2. Irredeemable debentures can act as an acknowledgment of indebtedness. 3. An irredeemable debenture signed by two directors.
Characteristics of irredeemable Debentures 4. Irredeemable Debentures are usually issued in series. Single debentures are also issued in rare cases. 5. A business organization also can issue irredeemable debentures without any undertaking to repay. 6. Irredeemable debentures will be paid after the company tenure.
Kinds of Debentures Convertible debentures: Debentures which are convertible into shares of the company are called Convertible debentures. Debentures which can be converted to either equity shares or preference shares by the company or debenture holders at a specified rate after a certain period. A company can also issue Partly Convertible Debentures whereby only a part of the amount can be converted to equity/preference shares..
Perpetual debentures: These are the debentures which are not cancelled on redemption and can be re-issued at time after their redemption. A bond with no maturity date. Perpetual bonds are not redeemable but pay a steady stream of interest forever. – Some of the only notable perpetual bonds in existence are those that were issued by the British Treasury to pay off smaller issues used to finance the Napoleonic Wars (1814). – Some in the U.S. believe it would be more efficient for the government to issue perpetual bonds, which may help it avoid the refinancing costs associated with bond issues that have maturity dates. Kinds of Debentures
Provisions regarding Debentures a)The debenture-holders and shareholders have the right to receive a copy of any trust-deed for securing any issue of debentures at their request on payment of a prescribed fee; (Section-113) b)No debenture, other than a convertible debenture shall carry voting right; Rights of convertible debentures shall not be in excess of rights of ordinary shares of equal paid-up value; (Section-114) c)A decree may enforce a contract with a company to take up and pay any debentures of the company; (Section-117)
Power to Re-issue Redeemed Debenture Sec 116 Where a company has redeemed any debentures previously issued, the company( unless the articles or the conditions of issue expressly otherwise provide) shall have power, to keep the debentures alive for the purposes of reissue, and where a company has purported to exercise such a power the company shall have power to reissue the debentures either by reissuing the same debentures or by issuing other debentures in their place, and upon such reissue the person entitled to the debentures shall have, and shall be deemed always to have had, the same rights and priorities as if the debentures had not previously been issued.
Re-issue of redeemed debentures Power to re-issue redeemed debentures in certain cases [Section 116] 1.Where with the object of keeping debentures alive for the purposes of reissue they have been transferred to a nominee of the company, a transfer from that nominee shall be deemed to be a reissue.
Re-issue of redeemed debentures Where a company has deposited any of its debentures to secure advances from time to time on current account. The debentures shall not be deemed to have been redeemed by reason only of the account of the company having ceased to be in debit while the debentures remained so deposited. The re-issue of a debenture or the issued of another debenture in its place shall be treated as the issue of a new debentures for the purpose of stamp-duty and registration.
Register of Debentures Holders Section 149 provides that every company shall keep a register of debenture holders and enter therein the following particulars namely: Names and addresses and description of each debenture holder. Debentures held by each debenture holder. Distinctive numbers of debentures held by each debenture holder. Date at which any person ceased be a debenture holder. The amount of the debenture to be considered as paid by each holder. The total number of the debenture bonds or certificates.
Register of Debentures Holders The register also contains a record of – the debentures transferred by a holder and – the balance held by him after the transfer. The company is also required to maintain an index of the names of the debentures holders, – if their number exceeds fifty, unless the register of debenture holders is self indexed. – Any alteration made in the register of debenture holders must also be entered in the index within 14 days from the date of such alteration.
Trust, Trust Deed and Trustees Whenever debentures are issued by the company to ensure security of repayment the company forms a trust and appoints trustees under trust deed. The purpose and functioning of the trust is stated in the trust deed. The trustees are responsible for safeguarding the rights of debenture holders and mortgage deed is entered into between the company and trustees. Certain powers and liabilities of the trustees are stated in Section-119 of the ordinance.
Power/Rights of Trustees The trustee can sue the company for all redemption monies ad interest in the following cases: Where the issuer of the debentures as mortgager binds himself to pay the debenture loan and accrued interest thereon, he can be sued on the date if the amount remains unpaid. Where trustees are deprived of all or part of security because of wrongful act of the issuer.
Power/Rights of Trustees Where the mortgaged property has become insufficient due to reasons other than wrongful act or default of the issuer, and security is not made up despite the provision of reasonable opportunity by the trustees. Where the trustee is entitled to take possession of the mortgaged property and that possession is not delivered to him by the issuer or any other person claiming the title of that property.
Power/Rights of Trustees If the trust deed so provides, the trustees can sell the mortgaged property or assets of the company without suing it. The trustees cannot be indemnified against any liability for breach of trust due to lack of care and negligence as a trustee. Any such indemnification in the trust deed would be void.
Issue of Securities and Redeemable Capital not based on Interest[Secton-120] A company may by public offer or upon terms and conditions contained in an agreement in writing issue redeemable capital in any or several forms to one or more scheduled banks, financial institutions or persons specified by the Federal Government for this purpose. Such capital may be issued either through public issue or upon terms and conditions contained in an agreement in writing.
Issue of Securities and Redeemable Capital not based on Interest[Secton-120] Such capital may be issued in consideration of any funds, moneys or accommodation received or to be received by the company, whether in cash or specie or against any promise or guarantee, undertaking or indemnity issued to or in favour of or for the benefit of the company.
[Secton-120] The agreement should provide the following a)Mode and basis of repayment of redeemable capital within a certain period of time. b)Arrangement for sharing of profit or loss. c)Creation of special reserve called the “participation reserve” by the company in the manner provided in the agreement.
Issue of Securities and Redeemable Capital not based on Interest[Secton-120] The terms and conditions for the issue of certificate of redeemable capital and the rights of their holders shall not be challenged or questioned by the companies or any of its shareholders. The provisions of the Companies Ordinance relating to creation, issue, increase or decrease of the capital shall not apply to the redeemable capital.