In case of issue of debenture as collateral securities.

(A) Cash is realised on such debenture as in the case of issue of other debenture
(B) Interest is paid on such debenture
(C) The holder can invoke the right/benefit of debenture
(D) No interest is paid on such debenture
(E) The holder has to release the security after the repayment of loan

Choose the correct answer from the options given below :

(C), (D) and (E) only

The correct answer is Option 1 - (C), (D) and (E) only.

(A) Cash is realised on such debenture as in the case of issue of other debenture- This statement is incorrect. No cash is realised.
(B) Interest is paid on such debenture- This statement is incorrect. No interest is paid on such issue of debentures.
(C) The holder can invoke the right/benefit of debenture- This statement is correct. If the company fails to repay the loan along with interest, the lender is free to receive his money from the sale of primary security and if the realisable value of the primary security falls short to cover the entire amount, the lender has the right to invoke the benefit of collateral security whereby debentures may either be presented for redemption or sold in the open market.
(D) No interest is paid on such debenture- This statement is correct. No interest is paid on such issue of debentures.
(E) The holder has to release the security after the repayment of loan- This statement is correct. After the repayment of loan, the holders of the debentures release the debentures.

A collateral security may be defined as a subsidiary or secondary or additional security besides the primary security when a company obtains a loan or overdraft from a bank or any other financial Institution. It may pledge or mortgage some assets as a secured loan against the said loan. But the lending institutions may insist on additional assets as collateral security so that the amount of loan can be realised in full with the help of collateral security in case the amount from the sale of principal security falls short of the loan money. In such situation, the company may issue its own debentures to the lenders in addition to some other assets already pledged. Such an issue of debentures is known as ‘Debentures issued as Collateral Security’. If the company fails to repay the loan along with interest, the lender is free to receive his money from the sale of primary security and if the realisable value of the primary security falls short to cover the entire amount, the lender has the right to invoke the benefit of collateral security whereby debentures may either be presented for redemption or sold in the open market. Debentures issued as collateral security can be dealt within two ways in the books of the company.