For nearly six centuries, lenders have used mortgages on real property to secure loans made to individual and commercial borrowers. The mortgage of the fourteenth century, however, is but a distant cousin of the various security devices used by commercial lenders today. For most of the period since the fourteenth century, the evolutionary process has been a gradual one. The past ten years, however, have witnessed dramatic changes in real estate secured lending. Inflation, high real and nominal interest rates, the deregulation of financial institutions, the growth of pension funds, the changing role of life insurance companies, the impact of new tax laws and the development of computer programs for sophisticated financial forecasting have all combined to radically change the capital markets and structure of real estate financing. Two popular new products- the convertible loan and the shared appreciation loan- have been developed in response to these changes. Both products combine traditional debt components with provision that resemble the risk and rewards of an equity position. In the current strained economic environment, the possibility of default by a debtor is a stark reality. One way of assisting companies through these uncertain times is for shareholders or creditors to convert loan claims against the company into shares.
The conversion or capitalization of debt into shares has various potential tax consequences. For companies with assessed losses, this may result in a reduction of the assessed loss. The reason for this is that the Income Tax Act provides that a taxpayer’s assessed loss must be reduced by the value of any benefit derived by it in consequence of a compromise or concession made with any creditor.
To study about shares and debentures,
To study about convertible debentures,
To analyze the conversion of loans into shares.
A Debenture is a unit of loan amount. When a company intends to raise the loan amount from the public it issues debentures. A person holding debenture or debentures is called a debenture holder. A debenture is a document issued under the seal of a company. It is an acknowledgment of the loan received by the company equal to the nominal value of the debenture. It bears the date of redemption and rate and mode of payment of interest. A debenture holder is the creditor of the company. Debenture loans are long term loans, usually taken by companies where they agree to pay at a specified future date. The loan is repaid in a fixed rate of interest to the debenture holder annually until maturity. Should the company fail to pay either the interest or principal amount at maturity of the loan; the debenture holders can force the company into liquidation to pay the amount due. A debenture is the traditional name given to a loan agreement where the borrower is a company. Typically, a debenture will set out the terms of the loan: the amount borrowed, repayment terms, interest, charges securing the loan, provisions for protecting and insuring the property etc., and terms for enforcement if the company defaults. Debentures are usually secured by charges on the company's property, but do not have to be (called 'bare' or 'naked' debentures). There are different types of charges. Debentures, as such, do not have to be registered, but charges securing them do. There are two types of debentures-
A type of loan issued by a company that can be converted into stock by the holder and, under certain circumstances, the issuer of the bond. By adding the convertibility option the issuer pays a lower interest rate on the loan compared to if there was no option to convert. These instruments are used by companies to obtain the capital they need to grow or maintain the business.
Convertible debentures are different from...
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