(Borrowed Fund-Long term Source of Finance)
Jaya Dhakate
Orrindrilla Halder
Payal Ghosh
Sania Biswas
Sonali Singh Yadav
Supriya Singh
Class - XI ‘C’
Guided By - Miss. Monali Mukherjee
Debentures are common securities issued under
borrowed fund capital. Debentures are instruments for
raising long-term debt capital. Debentures are called
creditor ship securities because debenture holder are
creditors of a company.
A debenture can be defined as “a document or a
certificate” issued by a company under its seal as an
acknowledgement of its debt .Holder of debenture
certificate is called debenture holder.
Features/Characteristics of
Debentures
1. Borrowed Fund. Debentures are part of borrowed fund capital
as debenture-holders are considered as the creditors of the
company.
2. Fixed Rate Of Interest. The interest on debentures is paid at a
fixed rate. The rate of interest is decided in the annual general
meeting of the company.
3. Compulsory Payment Of Interest. Payment of regular and
fixed rate of interest is a legal obligation of the company.
Company has to pay interest to its debenture-holders irrespective
of its profit-earning capacity.
4. Security. Most of the time debentures are issued against the
charge of some fixed assets of the company.
5. Redeemable. Debentures are always redeemed or paid
back on expiry of a fixed period of time.
6. No Voting Rights. Debenture holders have no say in
the management as they are never granted voting rights
in the company.
7. Appointment of Trustee. When a large number of
debentures are sold to the general public then usually a
trustee is appointed. Trustee can be a bank or financial
institution. The trustee is appointed to ensure that the
borrowing firm fulfils its contractual obligations.
1. Secured Debentures. Debentures which are secured by a
charge on the immovable property of the company are
known as secured debentures. In case of default by the
company, debenture-holders can recover money from the
mortgaged property.
2. Unsecured Debentures. Such debentures are unsecured
and do not carry a charge on the fixed assets of the
company. No property is mortgaged with the debenture-
holders. In case of default, they can file a case in the court
but cannot recover by selling an asset of the company.
3. Convertible Debentures. The debentures which gets
converted into equity shares on expiry of a fixed period
time are known as convertible debentures. The ratio of
conversion and the period of conversion is specified at
the time of issue of debentures.
4. Non convertible. The debentures which don't get
converted into equity shares are known as non convertible
debentures.
1. Low Cost. The cost of raising debentures is less than the cost of
raising preference shares or equity shares .It is a cheaper source of
finance.
2. No Dilution of Control. Debenture holders do not get any voting
rights .They are not allowed to participate in decision making so
debentures financing does not result in dilution of control of equity
shareholders .
3. Attract Large Number of Investors. The company offer a fixed
rate of interest on debentures .This fixed return appeals and attracts
many investors to invest in debentures .Hence the company can
collect a large amount of funds by issue of debentures.
4. Interest is Treated as an Expense. The interest paid to
debentures holders is considered as an expense of the
company .Interest is deducted from the total income of the
company before calculating income tax. So the liability of tax
reduces .
5. Low Rate of Interest. The earning rate of the company by
utilizing debentures fund is much higher than the rate of
interest offered to debenture holders in the capital structure.
6. Flexibility. A company can repay the funds raised through
debentures when it does not require it any more .The danger
of over capitalization gets minimized because debentures can
1. Fixed Obligation. Payment of interest is a fixed commitment of
the organization whether it is earning profit or not. Sometimes
companies have to borrow fund for payment of interest to
debenture-holders.
2. Reduction in Credibility. Financial institutions and lenders
hesitate to lend funds in the companies having more of
debentures is low.
3. Charge on Assets. Usually debentures are issued against
securities of fixed assets. During the time of depression, if a
company is unable to pay the regular amount of interest and finds
it difficult to repay the amount, in this situation the debenture-
holders can have claim over the assets of the company.
4. No Voting Rights. The debenture-holders are not allowed to
vote in the management of the company. All the decisions
regarding interest rate for debentures are taken by the equity
shareholders only. Therefore, they remain at the mercy of equity
shareholders.
