SEBI

Bearer Debentures – Meaning Features, Types, and Benefits

Introduction

Before discussing what Bearer debentures or Unregistered Debentures is, it is essential to understand Debentures and the key points to be kept in mind before utilizing them. Debentures are debt securities issued by a company to pay interest instead of the money borrowed for a predefined period. These are usually issued by the Blue chip (High rated Companies). Based on convertibility, security, redemption, priority, status, etc.

What are Debentures?

Debentures are financial instruments that represent a form of debt for the issuer. Companies and governments frequently use them to solicit funding from investors. Debentures are a type of loan where the issuer pledges to repay the principal amount to the debenture holders with regular interest payments, in contrast to shares, which represent ownership in a company. Debentures normally have a set period and interest rate and are issued for that duration. Bearer debentures and registered debentures are two different types of debentures that can be issued.

What are Bearer Debentures?

A particular kind of financial instrument companies or governments issue to raise money is called a bearer debenture. They are a type of loan where the issuer undertakes to pay the principal amount and regular interest payments to the debenture holder at a predetermined maturity date.

Bearer debentures are held and transferred differently from other kinds of debentures. Bearer debentures are distinguished by their capacity to be transferred via actual possession. Instead of being registered with the issuer, the actual certificate or document determines bearer debentures’ ownership.

The individual who has actual possession of the debenture certificate is referred to as the “bearer”. This indicates that the debenture holder is not needed to register their name with the issuer. Instead, possession of the actual certificate establishes ownership and rights to the debenture, making it a highly negotiable document. The physical certificates representing bearer debentures typically include information on the principal amount, interest rate, maturity date, and any other special terms or conditions. It is important to note that bearer debentures have declined in recent years due to regulatory concerns about money laundering and illegal activity. Stricter rules have been implemented, and some even forbid the issuance of new bearer debentures.

Characteristics of Bearer Debentures

Bearer debentures differ from other types of debentures in several significant aspects. These are some of the characteristics of bearer debentures:

1. Transferability: Bearer debentures are easily transferrable through physical ownership. Simply giving the debenture certificate to another person can change ownership. This characteristic makes bearer debentures more liquid and tradable on the secondary market.
2. Physical Certificate: As evidence of ownership, bearer debentures tend to be represented by physical certificates contain the terms and conditions of the debenture, including its face value, interest rate, and maturity date.
3. Interest Payment: For bearer debentures, interest payments are typically made to the person holding the actual certificate at the time the payment is due. In order to receive the interest payment, the debenture holder must produce the certificate to the issuer or its authorized agent. This method of payment streamlines the procedure and guarantees that the current holder of the debenture will receive interest.
4. Unregistered Debentures: Debentures that can be transferred by simply passing them over are known as bearer debentures, sometimes known as unregistered debentures. Bearer debentures, unlike registered debentures, do not require the transfer to be formally registered and do not have their ownership information listed in a debenture holder register.
5. Absence of Third Party: Bearer debentures can be sold without a third party or intermediary. Therefore, the process is simple. Simply giving the buyer the debenture certificate will complete the transfer.

Difference between Registered Debentures and Bearer Debentures 

In order to prove ownership, registered debentures must be registered formally in the investor’s name. An investor’s name, address, and contact information are entered into the issuer’s register when they acquire registered debentures. Direct contact between the issuer and the investor is made possible by this registration procedure, which also guarantees that the ownership of the debentures is correctly documented. Holders of registered debentures normally receive quarterly interest payments directly from the issuer, and the issuer can easily notify the investor in the event of any modifications or revisions.

Bearer debentures, also known as unregistered debentures, on the other hand, can be transferred simply by having them in your possession; a formal registration of the owner’s name is not necessary. With bearer debentures, the debenture certificate’s actual possession serves as the primary indication of ownership.Bearer debentures are made to be effortlessly transferable, and ownership may be changed by only giving the debenture certificate to a new holder. This feature offers the debenture holder a high degree of secrecy and anonymity. Bearer debentures normally pay interest to the person holding the actual certificate at the time the payment

¹

is due.

The degree of ownership documentation and transferability is where registered debentures and bearer debentures differ most from one another. Since the investor’s information is registered with the issuer, registered debentures have a clear record of ownership. This enables the issuer to provide personalized service and direct communication. Bearer debentures provide a higher level of confidentiality but make it harder for the issuer to track down specific debenture holders since they lack recorded ownership information and can be transferred without any requirements.

Advantages and Disadvantages of Bearer Debentures

Advantages:

• Bearer debentures have more trading options and are more liquid, making it simpler for investors to acquire and sell them on the secondary market.
• Bearer debentures guarantee ownership anonymity since they are not recorded in the investor’s name. This ensures privacy and secrecy.
• Investor convenience is provided through bearer debentures, which make ownership transfers simple without the need for any documents or procedures.

Disadvantages:

• Since bearer debentures seldom provide comprehensive information, it is up to owners to monitor their investments and make sure they receive the full amount due.
• Bonds must be delivered in person to a bank for redemption since interest payment coupons are easily misplaced if they are separated from the statement.
• If interest rates rise, the company that issued the securities may choose to redeem bearer debentures at any moment, giving investors very little influence over their investment.
• Collecting the principle and interest on a bearer debenture if the holder dies before the maturity date may be difficult or impossible.
• Bearer debentures can be used for illegal activities like money laundering and tax fraud because owners are not compelled to declare their earnings, which raises regulatory questions.

Prospects of Risk Involved While Buying the Bearer Debentures

With the purchase of the Bearer debentures, various benefits are attached. However, there are also certain risks involved which cannot be ignored. These risks involve:

• Lack of record-keeping of Bearer Debentures – The significant risk involved while purchasing the Bearer Debenture is that these securities are not recorded by the issuing company. As a result, replacement in case of a lost or stolen debenture is not possible. A person holding the bearer Debenture will be considered the owner as the owner of the bearer debentures can be changed by mere delivery.

NOTE: Since no information is printed on this type of debenture, the person who is holding the bond (Debenture) can claim the final payment.

• No Obligation in case of an increase in interest rate – In case of any increase in the interest rates, the issuing company can call back the bearer debentures anytime as the Issuing company is under no obligation.
• Significant Risk Factor in redeeming the Debentures – Risk factor is involved in losing the interest payment coupons if the debentures are detached and sent through the mail. Therefore, for redemption at the time of maturity, the bond needs to be delivered to a bank in person.

In the case of Bearer’s debenture holder’s death before the maturity date, it becomes nearly unfeasible to claim the principal and interest payments.

NOTE: The major risk involved while purchasing the Bearer Debenture is that these bonds can be easily used for money laundering and for evasion of tax. The reason is the fact that owners of bearer debentures are not able to turn up any profits that come from holding this type of Debentures.

Conclusion 

The Bearer debentures are classified based on transferability. The Bearer Debentures are useful for investors who wish to retain invisibility. Bearer debentures are negotiable instruments with a particular maturity period and coupon interest rate. As a unique type of financial instrument distinguished by their transferability through actual ownership, bearer debentures provide a unique solution. They appeal in some financial transactions because they provide investors with a degree of confidentiality and anonymity. However, because of strict regulatory oversight and worries about illegal activity, their use has diminished. Bearer debentures continue to provide advantages, including increased liquidity, diversification, and acceptability worldwide. It is unclear if bearer debentures will remain a viable choice as the financial landscape changes or if substitute financial products will take their place. Before using bearer debentures, issuers and investors should carefully analyze the benefits, drawbacks, and regulatory consequences.

FAQ

1. https://en.wikipedia.org/wiki/Payment