Expert Advisory Committee
ICAI-Expert Advisory Committee
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ACCOUNTING AND AUDITING

 

 

1.1       Query

 

Debentures guaranteed by the Govt. of India- whether

secured or unsecured

 

1.A company has issued debentures to certain banks on private circulation basis, i.e., for which no prospectus has been issued. The agreement of debentures contains the following clause:

 

            “Guaranteed by Government of India both as to repayment of principal and interest”.

 

2.The company has not given any tangible security, i.e., no present and future assets of the company have been mortgaged with the debentureholders. The company has also issued another series of debentures which are not guaranteed by the Government of India. The company has classified the latter as ‘unsecured loans’.

 

3.The querist has sought the opinion of the Expert Advisory Committee regarding the manner of classification of the above mentioned two types of debentures- i.e., whether these should be classified as secured or unsecured.

 

                                                 Opinion                                                         December 12, 1983

 

1.The Committee is of the view that debentures backed by Government Guarantees cannot be classified as ‘secured’ unless they are supported by tangible assets.  This is because the expression ‘secured loans’ covers only those loans which are secured by way of charge on tangible assets whether or not belonging to the borrower; it does not refer to certainty in the realizability of loan. Thus it is true, as far as debentureholders are concerned, that there may be a greater certainty of realization if the debentures are secured by Government guarantees. However, from the point of view of company, such debentureholders will not have any prior claim over the assets of the company in the event of its failure to repay the debentureholders’ money.

 

2.On the basis of the above, the Committee is of the opinion that both types of debentures- i.e., those backed by guarantee of Government of India and those which are not- should not be classified as ‘secured loans’. A separate disclosure can however be made in respect of the former as “Debentures guaranteed by Government of India both as to repayment of principal and interest.”

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