How Safe Are ‘Secured’ Debentures

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: Presently, the capital market is experiencing a boom and all the investors seem gung ho. However, most of the small investors having burnt their fingers in earlier scams would like to keep a safe distance from investing in equity shares. In recent years, there has been an increase in the debt instruments being issued by companies for raising resources. This trend gathered momentum, particularly after the Ketan Parikh scam. There is a general belief that debt instruments are safer than investment in equity and there are assured and regular returns.

In theory, there cannot be any argument with the fact that an investment in a debt instrument would be safer as compared to investment in equity. Besides, the investor can also look forward to regular receipt of interest on the said investment. Moreover, amongst the various debt instruments, debentures are one of the most widely used instruments by various companies. Of course, there several types of debentures, but basically there are two kinds of debentures viz. Secured and Un-secured debentures.

A company is permitted to issue secured debentures in accordance with the provisions of the Companies Act, 1956 (the Act). A listed company also has to follow SEBI regulations. The very term ‘secured debenture’ tends to raise visions of an instrument in which the amount invested would not be lost as the same is secured. In other words, investors tend to believe that investment in secured debentures is safe as the company creates a charge on its assets, thereby assuring the investors that their moneys are safe.. Is that the reality? Are secured debentures really secure?

First of all, every investor needs to realise that there is nothing like safe investment. Every investment entails a degree of risk, which would vary, depending upon the nature, terms and conditions of the instrument, background of the promoters, etc. Even assuming that secured debentures are issued by one of the best companies in the country, still there is no guarantee that the debentures would be redeemed on the due date.

While the regulators are aware of the pitfalls of the so-called ’secured debentures’ and have been taking steps to strengthen the law. The Act was amended in 2000 and more stringent provisions have been made for companies intending to issue debentures. Even the trustees are sought to be made more accountable so as to ensure that they protect the interests of investors.