Issue of Company Debentures

Company debenture is one of the important sources of finance for large companies, in addition to equity stocks, bank loans, and bonds. Companies need to follow certain procedures for issue of debentures to raise money. There are several ways of issuing a debenture viz. at a par, premium or discount and even for consideration other than cash. 

Issue of Debentures

The procedure of issuing debentures by a company is similar to the one followed while issuing equity stocks. The company starts by releasing a prospectus declaring the debenture issuance. The interested investors, then, apply for the same. The company may need the entire amount while applying for the debentures or may ask for installments to be paid while submitting the application, on allotment of debentures or on various calls by the company. The company can issue debentures at a par, at a premium or at a discount as explained below.

Different Ways for Issuing of Debenture

Once the company invites the applications and the investors apply for the debentures, the company can issue debentures in one of the following ways:

Issue of Debenture at Par

 When the issue price of the debenture is equal to its face value, the debenture is said to be issued at par. When a debenture is issued at par, the long-term borrowings in the liabilities section of the balance sheet equals the cash in the assets side of the balance sheet. Thus, no further adjustment is required to balance the assets and the liabilities of the company. The company can collect the whole amount in one installment i.e on an application or in two installments i.e. on an application and subsequent allotment. However, there might be a scenario in which money is collected in more than two installments i.e. on an application, on an allotment and at various calls by the company.

Issue of Debenture at Discount

The debenture is said to be issued at a discount when the issue price is below its nominal value. Let us take an example – a Rs. 100 debenture is issued at Rs. 90, then Rs.10 is the discount amount. In such a scenario, the liabilities and the assets sides of the balance sheet do not match. Thus, the discount on debentures’ issuance is noted as a capital loss and is charged to ‘Securities Premium Account’ and is reflected as an asset. The discount can be written off later.

Issue of Debenture at Premium

When the price of the debenture is more than its nominal value, it is said to be issued at a premium. For example, a Rs. 100 debenture is issued for Rs.105 and Rs.5 is the premium amount. Again, assets and liabilities do not match in such situation. Therefore, the premium amount is credited to Securities Premium Account and is reflected under ‘Reserves and Surpluses’ on the liabilities side of the balance sheet.

The issue of Debenture as Collateral

The debentures can be issued as a collateral security to the lenders. This happens when the lenders insist on additional assets as security in addition to the primary security. The additional assets may be used if the complete amount of loan cannot be realized from the sale of the primary security. Therefore, the companies tend to issue debentures to the lenders in addition to some other physical assets already pledged. The lenders may redeem or sell the debentures on the open market if the primary assets do not pay for the complete loan.

Issue of Debenture for Consideration Other Than Cash

Debentures can also be issued for consideration other than cash. Generally, companies follow this route with their vendors. So, instead of paying the cash for the assets purchased from the vendor, the companies issue debentures for consideration other than cash. In this case, also, the debentures can be issued at a par, premium or discount and are accounted for in the similar fashion.

Over Subscription

The company invites the investors to subscribe to its debenture issue. However, it may happen that the applications received for the debentures may be more than the original number of debentures offered. This scenario is referred to as over-subscription. In the case of over-subscription, a company cannot allocate more debentures than it had originally planned to issue. So, the company refunds the money to the applicants to whom debentures are not allotted. However, the excess money received from applicants who are allocated debentures is not refunded. The same money is used towards allotment adjustment and the subsequent calls to be made.

Conclusion: Several companies decide to issue debentures to raise capital, along with the other sources of long-term finance. The companies need to follow the regulations and the procedure associated with the issuance of debentures. Further, they also need to account debentures issued at a par, premium or discount accordingly.



  • />
  • />
Last updated on : December 28th, 2016
What’s your view on this? Share it in comments below.

Leave a Reply

Advantages and Application of Ratio Analysis
  • Piggybank Surrounded In Coins Showing European Savings
    Cash Ratio
  • Improve Liquidity by Effective Cash Management
    How to Improve Liquidity by Effective Cash …
  • Coverage Ratio and Types of Coverage Ratios
    Coverage Ratio and its Types
  • Gross Profit Margin
    Gross Profit Margin
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Join 122 other subscribers

    Recent Posts

    Find us on Facebook

    Related pages

    letter of credit irrevocabledefinition of horizontal mergerdefine solvency ratioirrevocable standby letter of credit definitionmotives of mergersnet asset turnover ratio formuladifference between shares and debenturesweighted average profitability index formulazero base budgeting pdfdefinition of debenturebanking covenanthow to calculate sales turnover ratioprofitability index meaningfinance payback periodcalculate discounted payback periodinventory conversion period formuladcf valuation methodsolving for yield to maturitytemporary overdraftnwc definitionratio of fixed assets to long term liabilities formulaearnings to fixed charges ratiowealth maximization meaningloan covenant definitionmeaning of discounted cash flowliquidity calculation formulaprofitability ratios calculation formulas and explanationsfixed asset turnover ratio examplecredits and debits explaineddebit definition accountingcalculating dividend payoutcreditor days formuladebentures advantagesadvantages and disadvantages of hedge fundsimport documentary creditmicro and macro environmental factors affecting businessbank debenture definitionwhat is wealth maximization and profit maximizationmodified internal rate of return calculatorsolvency ratio normzero based budgeting examplesreturn on stockholders equity exampleifrs vs gaap intangible assetsmeaning of profitability ratiosdiscounted payback calculatorcapital vs finance leaseinvestment turnover ratio interpretationlimitation of payback perioddefinition of payablesasset turnover ratio equationsolvency test ratiooperating cycle of working capital managementadvantages and disadvantages of debt and equitybills payable entryaverage collection period ratio analysiscapitalization vs expenseadvantages and disadvantages of import and exportcapm and cost of equitywhat is the meaning of bills payable and bills receivablestrade debtorsformula for operating leverageaverage collection period ratiosbi bank dubaiirr wikipediapayback defineworking capital to sales ratio interpretationequation for dividendshindi meaning of incurredwhat is conglomerate integrationcapital vs operating lease accountinginvestment appraisal payback periodadvantages and disadvantages of equity financingoperating leverage ppthypothecation agreementcost of capital and npvdu pont formula