Question

Describe the meaning of ‘Debenture Issued as Collateral Securities’.

Answer 1

The term collateral security means additional or secondary security in addition to the primary security. Sometimes, when a company takes a loan from a financial institution, besides the primary security, the company may issue debentures for additional security (as collateral security). The lender that receives debentures as collateral security is not entitled to interest on them. If the company defaults in repaying the principal amount (i.e., the loan amount) or the interest on the loan, the lender has the full right to recover their dues from the sale of the primary security. But if the primary security is insufficient to recover the debt amount, the debentures issued as collateral may be used to recover the remaining amount.