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Bearer Debentures: Everything You need to know

Priyanka Bajpayee

| Updated: Dec 23, 2019 | Category: SEBI

Unregistered Debentures

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

Debentures can be divided into different categories which include

  • Convertible Debentures (Partly Convertible and Fully Convertible Debentures)
  • Non-Convertible Debentures
  • Secured Debentures
  • Unsecured Debentures
  • Optionally Convertible Debentures.
  • Registered Debentures
  • Bearer Debentures
  • Redeemable and Irredeemable Debentures
  • Mortgage
  • Equitable Debentures, etc.

The list is just endless, and therefore naturally the reason why a good understanding of Debentures is vital in a fruitful investment.  

What are the key points required to be kept in mind while issuing Debentures?

The compliance with respect to Non-Convertible Debentures are-

  1. No voting right-Debentures cannot be issued with voting rights.
  2. Debenture Trustee’s Appointment-Without appointing a debenture trustee, A company cannot issue debentures to more than 500 people, whose duty would be to protect the interest of Debenture Holders and redress their grievances.
  3. Creation of Debenture Redemption Reserve-On issue of debenture a company shall create a Debenture Redemption Reserve.
  4. Charge in favor of Debenture Trustee-The Tribunal will be approached by the Debenture Trustee to take an appropriate step, In case of any default in repayment of the amount in the event of maturity or default in payment of the interest thereon then the Tribunal will be approached by the Debenture Trustee to take appropriate measures.
  5. Penal Provisions-The officer in default with the provisions of this section shall be liable to fine and or imprisonment or both.

Now we will discuss the Bearer Debentures and what are the features of Bearer Debentures and how it is different from the other Debentures.

What are Bearer Debentures?

Bearer debentures are the Debentures that can be transferred by mere delivery and are payable to the bearer of the instrument. i.e. the person holding the instrument. Records of Bearer Debentures are not maintained in the register of debenture holders, and registration of transfer is not necessary. Bearer Debentures are also known as Unregistered Debentures.

Salient Features of Bearer Debentures

The salient features of Bearer Debentures are as follows-

  • Unregistered Debentures-Bearer debentures are also known as Unregistered Debentures as it can be transferred by mere delivery. Records of Bearer Debentures are not maintained in the register of debenture holders and registration of transfer is not necessary.
  • Issued in Physical Form-Bearer debentures are issued in physical form, i.e., on paper.
  • Receives the Interest Payment through Coupon-The Holder of the Bearer Debentures, in order to receive interest payments needs to submit the coupons for interest payments that are physically attached to the security to the bank or the issuing company.
  • Redemption of Bearer Debentures-Bearer Debentures can be redeemed within 30 days from the date of maturity which is printed on the bond.
  • No 3rd Party is involved in Sale-In case of selling the Bearer Debentures it is relatively easier as no third party or intermediary is required. As a result, it can be simply transferred by just submitting the certificate to the other person.

How Bearer Debentures are different from Registered Debentures?

Bearer Debentures are termed as Unregistered Debentures as they can be transferred by mere delivery. However, in the case of Registered Debentures, the transfer cannot be done by mere delivery and all the required details are recorded in the register of the Debenture Holders.

These details include-

  • Name of the debenture holder
  • Type of debenture,
  • Number and value of the debenture.

Bearer Debentures can be transferred by mere delivery and are payable to the bearer of the instrument. i.e. the person holding the instrument.

Records of Bearer Debentures are not maintained in the register of debenture holders, and registration of transfer is not necessary.

Prospects of Risk involved while Buying the Bearer Debentures

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

  1. Lack of record-keeping of Bearer Debentures-The major 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 a 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 debentures, 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.
  • Major Risk Factor involved which 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 date of maturity, 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 being 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 on the basis of transferability. The Bearer Debentures are useful for investors who wish to retain invisibility. Bearer debentures are a negotiable instrument with a particular maturity period and coupon interest rate.

Priyanka Bajpayee

Priyanka Bajpayee has done Masters in International Business Law and well versed in content writing covering the area of legal and finance. Also, she has practical experience of almost 1.5 years in Legal compliance and secretarial work.

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