Question

Define Debenture. What is meant by issue of debentures as collateral security? Explain with the help of an example.

Hint:

Issuing debentures as collateral security offers assurance to debenture holders in case of default by the company.

Answer 1

Step 1: Definition of Debenture.
A debenture is a long-term debt instrument issued by a company to raise funds. It is a form of borrowing where the company promises to pay a fixed interest and repay the principal amount at a specified time in the future.
Step 2: Issue of Debentures as Collateral Security.
When a company issues debentures as collateral security, it means that the debenture holders have a claim on the company’s assets if the company defaults in repaying the debt. The company pledges its assets to secure the loan provided by the debenture holders.
Step 3: Example.
For example, a company may issue debentures worth Rs. 10 lakhs, and in return, the company pledges its property worth Rs. 15 lakhs as collateral. If the company fails to repay the debenture holders, the property will be sold off to recover the amount.
Step 4: Conclusion.
Issuing debentures as collateral security reduces the risk for debenture holders, as they have the right to claim the pledged assets if the company defaults. Final Answer: \[ \boxed{\text{Debentures are long-term debt instruments, and issuing them as collateral security protects debenture holders by securing assets.}} \]