A legal document that denotes a safe means by which a creditor can lend money to the borrower is called a Debenture. One of the important sources of finance for large companies is the company debenture, besides, the equity stocks, bank loans, and bonds. Certain procedures need to be followed for the issue of debentures with the motive of raising money.
There are various ways of issuing a debenture i.e. at par, premium or discount and even for consideration other than cash. The procedure of issuing the debentures by a company is similar to the one that is followed at the time of issuing equity stocks. The initial step of the company is to begin by releasing a prospectus, declaring the issue of the debenture. The stockholders that are interested, then further apply through the prospectus. The company may ask for the entire amount at the time of applying for the debentures. There are chances that the company may ask for the same in installments at the time of submitting the application, on the allotment of debentures or on various calls by the company. The debentures can be issued at par, at a premium, or at a discount.
The issue of debentures at par
When the price of the debenture at the time of issue is equal to that of the 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 column of the balance sheet is equal to the cash in the assets side of the balance sheet. Hence, there is no need to make any adjustments in order to balance the assets and liabilities of the company. The whole amount can be collected by the company in one installment i.e. on an application or in two installments i.e. on an application and subsequent allotment. There may occur a situation in which the money is collected in more than two installments i.e. on the application, on the allotment and at different calls by the company.
The issue of debentures at a discount
The time when the issue price of the debentures is less than that of the nominal value, it is said to be issued at a discount. Thus, the discount on the issue of the debentures is noted as a capital loss and is charged to the Securities Premium Account and is shown as an asset. The discount is then written off later.
The issue of debenture at a premium
At the time of issue of the debentures, if the price is more than that of the nominal value, it is said to be issued at a premium. Hence, assets and liabilities won’t match in such a situation. Therefore, the account named securities Premium Account gets the credit and is shown in the Reserves and surplus on the liabilities side of the balance sheet.
The issue of debentures as collateral
The debentures may be issued as a collateral security to the investors. This situation occurs when the lenders insist on some extra assets and possessions. These assets act as the security in addition to the primary security. Additional assets are used because the company is unable to complete the amount of loan. Therefore, the companies have the tendency to issue the debentures to the borrowers in addition to the other physical assets already assured.
The issue of debentures for consideration other than cash
Debentures can also be issued for consideration other than cash. this route is followed by the companies with their dealers. Hence, rather than paying the cash for the assets purchased, the companies issue the debentures for the consideration other than cash.
Related Article: Types of Debentures