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Debentures

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Meaning of Debenture:

It is a document issued by a company under its common seal acknowledging the debt and it also contains the terms of repayment of debt and payment of interest at a specified rate. The term “debenture” indicates to long loan or long-term debt.  A company may raise its long-term fund either by issuing of shares or by issuing of debenture. If a company decide to raise capital, it issue shares and if long-term loan then it issues debenture.  A debenture is a certificate issued by a company acknowledging debt of public borrowing. It is a portion of loan capital. The owners of debentures are called debenture holders.

According to Topham “A debenture is a document given by a company as evidence of a debt to the holder usually arising out of a loan and usually secured by a charge.”

Characteristics of Debenture

The following are the main characteristics of debentures:

  • It is a written certificate issued by the company as an acknowledgement of a debt.
  • It is issued under the company’s seal.
  • It contains the rate of interest to be paid to the subscribers.
  • It contains mode of payment of the principal amount and interest.
  • It is a long term public borrowing from a large section of the general public.

Difference between Shares and Debentures


Shares

Debentures

Shareholders are the owners of the company.
Debenture holders are the creditors of the company.
Dividend is paid on shares out of profits on the recommendation of directors.

A fixed rate of interest is to be paid to the debenture holders.

Rate of dividend on the share capital is not fixed.
A rate of interest is prefixed.
In the event of liquidation, the shareholders fund is refunded after every claim is settled.
In the event of liquidation, debenture holders are refunded before payment to shareholders.

Types of Debentures

Following are the different types of debentures with their basis of classification:

On The Basis of Redemption:

(i) Redeemable Debenture: The debenture which carry a specific date of redemption on the certificate is known as redeemable debenture. It will be repaid by the company at the end of the specified period.  They are paid either in lump sum at the end of the specified period or in instalments during the lifetime of the company.

(ii) Irredeemable Debenture: The debentures which do not have any specific date of redemption is known as irredeemable debenture. They are redeemed either at the time of liquidation or at the time when desires to pay it off.

On The Basis of Convertibility:

(i) Convertible Debentures: The debenture which can be converted into either equity shares or other securities at the option of the debenture holders or at the option of the company is known as convertible debenture. When the full amount of debenture is converted into shares then they are known as Fully Convertible Debentures whereas when a part of debenture is converted into shares then they are known as Partly Convertible Debentures.

(ii) Non- Convertible Debentures: The debenture which cannot be converted into shares or securities is known as non-convertible debenture. These debentures are being used as a tool to raise long-term funds by companies through public issue.

On The Basis of Security

(i) Secured Debenture: The debentures which are secured by charge on assets are known as secured debentures. It is also known as mortgage debenture. When the debentures are secured on particular assets of the company then it is known as fixed charge and when debentures are secured on all assets of the company then it is known as floating charge. If the company is not able to repay the money to the debenture holders then they have the option to realize the money from the assets mortgaged with them.

(ii) Unsecured Debenture: The debenture which is not secured with any charge is known as unsecured debenture. At the time of liquidation, the holders of such debentures are treated as similar to that of unsecured creditors. This is also known as naked debenture.

On The Basis of Transferability

(i) Registered Debenture: These type of debentures are not freely transferable. The details of debenture holders(i.e. name and address) are recorded in the Register of Debenture holders maintained by the company. Principal amount, as well as the amount of interest in such type of debenture, are paid to the person whose name appears as debenture holder in the register maintained by the company.

(ii) Bearer Debenture: The type of debenture in which details of the debenture holders are not recorded in the company and which are transferable by mere delivery are known as bearer debentures. Principal amount, as well as the amount of interest in such type of debentures, are paid to the bearer of such debenture.

On the basis of priority

(i). First Debentures: These debentures are redeemed before other debentures. First debenture is repaid before the other debenture.

(ii). Second Debentures: These debentures are redeemed after the redemption of first debentures. The second debenture is paid after the first debenture has been paid back.