Suvidha Ltd. was on the verge of expansion. It was requiring ₹40 lakhs for modernisation of its Machinery. It decided to issue Rs.30 lakhs, 7% debentures to public for cash and to borrow ₹10 lakhs from SBI Bank as long term loan, with a condition from SBI to issue ₹12 lakhs. 7% debentures as a subsidiary security besides the primary security, to which the company agreed. The face value of 7% debenture was ₹100.

Identify the term used for the 7% debentures issued to SBI Bank as subsidiary security.

Debentures issued as collateral security

The correct answer is option 3- Debentures issued as collateral security.

The term used for the 7% debentures issued to SBI Bank as a subsidiary security is Debentures issued as collateral security. These debentures are issued to SBI Bank to provide additional security for the long-term loan obtained from the bank. They act as collateral, or security, for the loan.

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.