Debentures as a Security for the Loan/Advance :

Debenture is a document issued by a company acknowledging its indebtedness to the bearer or a registered holder. A fixed rate of interest is payable at stated periods on such debentures. In the case of mortgage debentures, a charge is created on the assets of the company issuing such debentures in favour of a trustee who is responsible to take care of the interest of individual investors.

Advantages

(i) Easy to sell.

(ii) Not subject to violent price fluctuations.

(iii) They can be transferred at minimum cost.

(iv) Bearer debentures are fully negotiable.

(v) They rank in priority to shares and mostly secured by a charge on the company’s property.

Disadvantages

(i) If interest is not paid regularly on the debentures it would affect its price and marketability.

(ii) If the charge on property of company is not registered, the subsequent charges will get a priority.

(iii) Debentures may be issued by companies having no power to borrow money.

Precautions to be taken while taking debentures as security

(i) The nature of the debentures must be ascertained, i.e., whether they are unsecured or secured, the later, being preferred.

(ii) The borrowing powers of the company issuing the debentures must be ascertained, and to verify that the same has not been exceeded.

(iii) Deposit of the debentures plus a memorandum of deposit is necessary.

(iv) The nature and value of the assets charged must be examined frequently.

(v) The banker must find out whether there are any un-cancelled redeemed debentures.