Class 12 Secretarial Practice Chapter 7: Correspondence with Debentureholders

Key concepts: Correspondence with Debentureholders

Debenture

An acknowledgement of debt issued by the company. It is borrowed capital, issued for a specific period and carries a fixed rate of interest.

Debentureholder

A creditor of the company who has lent money by buying debentures. He is not an owner and gets interest, not dividend.

Letter of allotment

Sent when debentures are allotted, giving debentures applied and allotted, distinctive numbers, amount received, interest rate and maturity. It is exchanged for the Debenture Certificate.

Interest warrant

The instrument sent with the interest letter to pay interest on debentures. Interest can also be paid electronically by ECS or NEFT.

Convertible debentures

Debentures that are converted into equity shares after a specified period at a specified rate mentioned in the terms of issue.

Redemption of debentures

Repayment of debentures when they fall due. A Debenture Redemption Reserve Fund is created and a redemption form is sent with the letter.

Debenture certificate

The document evidencing the holding of debentures; it must be issued within 6 months from the date of allotment.

Precautions in letters

Politeness, prompt response, legal provisions, transparency, conciseness, precise information, secrecy and good image of the company.

Quick revision: important points

• Debenture certificate must be issued within 6 months of allotment.
• Without a Debenture Trustee, debentures cannot be issued to more than 500 people.
• Interest is a debt paid at a fixed rate; it does not depend on profits.
• Conversion needs a special resolution of shareholders at an EGM, after the Letter of Option.
• Four occasions: allotment, interest payment, conversion, redemption.

Practice MCQs with answers

1. The debenture capital of a company is:

   1. Owned capital
   2. Permanent share capital
   3. Borrowed capital
   4. Reserve capital
   Show answer

   Answer: C. Borrowed capital
   A debenture is an acknowledgement of a debt, so debenture capital is money borrowed by the company.

2. Debentureholders are ........ of the company.

   1. Owners
   2. Directors
   3. Debtors
   4. Creditors
   Show answer

   Answer: D. Creditors
   They have lent money to the company, so they are its creditors, not its owners.

3. Within what period from the date of allotment must the certificate of debentures be issued?

   1. 6 months
   2. 2 months
   3. 3 months
   4. 12 months
   Show answer

   Answer: A. 6 months
   The textbook states that the debenture certificate should be issued within 6 months of allotment.

4. A company cannot issue debentures to more than how many people without appointing a Debenture Trustee?

   1. 100
   2. 500
   3. 1,000
   4. 250
   Show answer

   Answer: B. 500
   For issue to more than 500 people a Debenture Trustee must be appointed.

5. The return that a debentureholder receives on his investment is:

   1. Dividend at a rate recommended by the Board
   2. A share in the profits
   3. Interest at a fixed rate
   4. Bonus shares
   Show answer

   Answer: C. Interest at a fixed rate
   Debentures carry a fixed rate of interest as the return on investment.

All Class 12 Secretarial Practice chapters

• Chapter 1: Introduction to Corporate Finance
• Chapter 2: Sources of Corporate Finance
• Chapter 3: Issue of Shares
• Chapter 4: Issue of Debentures
• Chapter 5: Deposits
• Chapter 6: Correspondence with Members
• Chapter 7: Correspondence with Debentureholders
• Chapter 8: Correspondence with Depositors
• Chapter 9: Depository System
• Chapter 10: Dividend and Interest
• Chapter 11: Financial Market
• Chapter 12: Stock Exchange

Class 12 Secretarial Practice notes: all chapters