Jul 24 , 2021
By Yehualashet Tamiru Tegegn ( Yehualashet Tamiru Tegegn (firstname.lastname@example.org), lawyer, consultant and researcher, )
With the establishment of a capital market, one of the financial instruments at play will be debenture, a complex but effective means of diversifying risk among creditors that nonetheless has never been used in the Ethiopian market, writes Yehualashet Tamiru Tegegn (email@example.com), adjunct lecturer at Addis Abeba University and an associate at MTA.
In a bid to open up the economy, parliament recently revised Ethiopia’s Commercial Code, which had been in use for more than six decades. One of the areas of change is the rule and regulation on debenture. A company may finance itself not only by equity financing, which is by the issuance of shares in exchange for contribution, but also by issuing debt financing. One of the typical forms of debt financing is the issuance of a debenture.
The term originated from the Latin word debentur. It was first employed to refer to a form of acknowledgment of indebtedness in England to pay the wages of servants. Later, the same was given to soldiers to charge the government of England payment due upon computing the account of their arrears. The contemporary means of debenture is a document issued by a company as evidence of indebtedness and entitling its holder to a fixed interest rate until the principal amount is paid.
Debenture has benefits both for the issuing company and the lender. The main one is the distribution of risk among creditors. It is easier to get 100 people to buy 1,000 Br each in debentures rather than a single person to finance 100,000 Br. Another benefit is that since the sale of a debenture does not confer voting rights to the lender, the original shareholders do not lose their power of control as a result of the issue of debentures.
Until today, no company has ever issued debenture in Ethiopia. One of the reasons is what J. Escarra (Prof.), who was the mastermind behind the Commercial Code, felt was the lack of sophistication of Ethiopia’s economy. The lack of familiarity with the concept in the legal and business communities did not help either. Perhaps the most compelling reason is the absence of a capital market to trade debentures in the secondary market. Now, with the introduction of the capital market proclamation, it could gain greater usage.
The recently revised Commercial Code defines debenture as a transferrable debt instrument where the issuing company pays a fixed interest to the lender (debenture holder) for a specified period of time and repays the loan upon maturity. This definition encompasses two key elements.
Arguably the most significant aspect is the recognition of debenture as a transferrable debt instrument, implying that it is a negotiable instrument. The Commercial Code recognises three categories of such instruments: commercial instruments, transferable securities, and documents of title to goods. Debenture as transferable security, therefore, is a document incorporating a right to entitlement in such a way that it is not possible to enforce or transfer the right separately from the instrument.
Because of this feature, the debenture can be pledged to guarantee the performance of an underlining contract. In the new movable property security right proclamation, a pledge is not restricted to corporate movable property but also extended to intangible goods, the latter of which could encompass debenture.
Fixed interest is also paid on the debenture for a specified period of time and the loan is repaid upon the date of the maturity date. This implies that companies are not entitled to issue non-conversion, perpetual debentures, and zero-coupon rate types of debentures. By implication, the issuance of perpetual or irredeemable debentures is prohibited in the revised Commercial Code. As the law requires a fixed interest rate, it in effect excludes debentures that do not carry a fixed interest rate (zero-coupon debentures).
However, there is no prohibition to a share company issuing both bearer and registered debentures. The main difference between the two is the manner of transfer. In the case of bearer debenture, there are only two requirements: endorsement and transfer. However, there is a third requirement of registration for effective transfer of registered debenture.
It is only share companies that are permitted by the law to issue debenture. A share company may do this if its capital is paid up fully and it has been in business for at least a year and has issued a balance sheet approved by its general assembly. As a matter of rule, the debenture issued by the company should not exceed the paid-up capital.
All too often, compared to shareholders, debenture holders are susceptible to exploitation. The shareholders of a company are regarded as owners as they have a defined interest in the company while the debenture holders are mere lenders or creditors. Unlike the shareholders who are regarded as insiders, the debenture holders are seen as outsiders, who can not attend and vote in a general assembly.
Thus, to mitigate this power imbalance, the law permits debenture holders to form and organise as a legal entity having a separate legal personality to protect and enforce the loan agreement. The general meeting of debenture holders, among other things, can consider proposals of the debtor company in relation to its structure, possibility of mergers, issuance of debenture with priority over the existing one, and terms of loan. A resolution of debenture holders is adopted by a simple majority.
The establishment of a capital market will likely increase the use of debentures within the private sector, especially as a way of raising money or as an investment opportunity for those with excess liquid assets. It is a complicated financial instrument, but it will be one of the tools at play in the gradually opening up and diversifying finance sector.
PUBLISHED ON Jul 24,2021 [ VOL 22 , NO 1108]
Radar | Feb 09,2019
Radar | Jul 13,2019
Radar | Oct 16,2021
Commentaries | Apr 24,2021
Featured | Oct 19,2019
Fortune News | Sep 24,2018
Featured | Sep 18,2021
Radar | Jan 18,2020
Commentaries | Oct 12,2019
Photo Gallery | 60672 Views | May 06,2019
Photo Gallery | 52616 Views | Apr 26,2019
Fortune News | 49943 Views | Jul 18,2020
Fortune News | 49173 Views | Sep 01,2021
Commentaries | Dec 04,2022
Life Matters | Dec 04,2022
My Opinion | Dec 04,2022
Sunday with Eden | Dec 04,2022
Agenda | Dec 04,2022
Editorial | Dec 04,2022
Jul 2 , 2022 . By RUTH TAYE
On a rainy afternoon last week, a coffee processing facility in the capital's Akaki-Qality District was abuzz with activ...
Nov 27 , 2021
Against my will, I have witnessed the most terrible defeat of reason and the most sa...
Nov 13 , 2021
Plans and reality do not always gel. They rarely do in a fast-moving world. Every act...
Oct 16 , 2021 . By HAWI DADHI
Residing in a country with no capital market, an organised marketplace for trading se...
Leaders of the National Election Board are in a charm offensive mood, of a sort. Last week, they organised a rare tour for members of the me...
When the country's most senior diplomats and envoys return back to their posts after two-week debriefings, they leave behind a point or two...
Dec 4 , 2022
Last week saw enraged university lecturers' threatening to stage a strike. They addre...
Nov 26 , 2022
In the wake of the liberalization of the telecom sector, Ethiopian authorities have m...
Nov 19 , 2022
The rounds of talks to end wars in Ethiopia held in Pretoria, South Africa, and Nairo...
Nov 12 , 2022
Two weeks have passed since negotiators from Ethiopia's federal government and the TP...
What are the odds of seeing a housemaid who loves the job dearly and wakes up every morning to do the chores with excitement? Well, this...
Dec 3 , 2022
The nostalgia for the combustible engine, with the noise and smell of burned fossil f...
Dec 4 , 2022 . By MUNIR SHEMSU
A self-proclaimed industrial park alias "Hawassa Textile & Industrial Park" canno...
Dec 4 , 2022 . By BERSABEH GEBRE
Awash Bank shareholders voted to boost the paid-up capital to 55 billion Br in the ne...
Dec 4 , 2022 . By RAHEL BOGALE
The expansion project under the country's largest referral hospital runs aground due...
Or see contact page