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Collateral debentures are issued as additional security when a company, like XYZ, seeks a loan. For instance, if XYZ wants to raise a loan of 50 lakhs, it pledges its machinery as security for the loan. Alongside, the company may issue debentures worth 60 lakhs, which are given to the bank as further collateral. These debentures serve as supplementary security and remain with the bank. They can only be utilized if the company defaults on the original loan. Thus, while the loan is against an asset (the machinery), the issued debentures provide the bank with an extra layer of security.