INTRODUCTION:
- A Debenture is basically some of the loan amount the company was interested to raise from the public, that is why it issues debentures. A person who has bought a debenture and holding it is called a debenture holder. A debenture holder is the creditor of the company. Under the seal of the company. Debenture is issued under the seal of the company. It is an acknowledgment of the funds received by the company equal to the nominal value of the debenture. It includes the payment of interest at a fixed rate till the times the principal sum becomes repayable. There may or may not be a charge put on the sets of the company as security. The date of redemption along with the rate and mode of payment of interest are mentioned in it.
Characteristics of Debentures
·Debenture is a movable property. It is in the form of a certificate of indebtedness of the company and issued by the company itself. It generally creates a charge on the undertaking or undertakings of the company. There is usually a specific date of redemption.
·The debenture holders are creditors to the company. The company is only under debt of the debenture holders.
·As the debenture holders are not the owner of the company. They are not entitled with the administration and management of the company.
·The debenture holder need not be concerned with the profits or loss of the company, they have a fixed rate of interest on the principal amount which they get every year irrespective of the financial condition of the company.
·Debentures usually have a charge on the assets of the company, which means that if the company on liquidation is not able to repay the amount, debenture holders can sell of property of the company to recover money.
·There is an undertaking given by the company to repay debenture holders the principal amount along with the interest at the state time.
·The debenture holders cannot claim the privilege to vote in any meeting of the company.
·When the company is winding up the first priority of the company is to repay to the debenture holders of the company hence, there is no risk involved of loss of money of the debenture holders.
·There is a series with pari passu clause which is usually a part of the debentures being issued. It would be equal as security and if the security is being enforced, the amount shall be discharged relate ably. If there is deficiency of assets, the division will be proportionately.
Kinds of Debenture
Debentures are generally classified into different categories on the basis of:
(1)Convertibility of the instrument
(2)Security of the instrument
(3)Redemption ability
(4)Registration of Instrument
Debenture includes debenture stocks, bonds or any other instruments of a Company evidencing a debt, whether constituting a charge on the assets of the Company or not.
There are many types of debentures, which include:
Non-convertible debentures, Partly convertible Debentures, Fully convertible debentures, Optionally convertible debentures, secured debentures, Unsecured debentures, Redeemable debentures, Perpetual or Irredeemable debentures, Registered debentures, Bearer debentures.
1.on the basis of convertibility, Debentures are classified into following categories:
(A) Non-convertible Debentures – This type of debentures cannot be converted either into preference shares or equity shares. Non-convertible debentures can either be unsecured or secured. These type of debentures are usually redeemed only on the maturity of a period, which may be 10 or 20 years. These instruments retain the debt character and can not be converted into shares.
(B) Partly Convertible Debentures - A part of these instruments are converted into equity shares in future at the notice of issuer. The issuer decides the ratio for conversion. The ratio is usually decided at the time of subscribing the debentures. If a debenture converts some of his debentures into share, the member as other shareholders for those shares, amending the rights accordingly. Hence, convertible debentures may be called as debentures which can be converted by the debenture holder after a specific time.
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