Debenture

Debenture

• 1.
  DEBENTURE  A Debentureis a unit of loan amount.  When a company intends to raise the loan amount from the public it issues debentures. It bears the date of redemption , rate and mode of payment of interest.  A person holding debenture or debentures is called a debenture holder.  A debenture holder is the creditor of the company.  A debenture is a document issued under the seal of the company.
• 2.
  TYPES OF DEBENTURES
• 3.
  TYPES OF DEBENTURES Fromsecurity point of view (i) Secured or Mortgage debentures : These are the debentures that are secured by a charge on the assets of the company. These are also called mortgage debentures. (ii) Unsecured debentures : Debentures which do not carry any security with regard to the principal amount or unpaid interest are called unsecured debentures. These are called simple debentures.
• 4.
  On the basisof redemption (i) Redeemable debentures : These are the debentures which are issued for a fixed period. The principal amount of such debentures is paid off to the debenture holders on the expiry of such period. (ii) Non-redeemable debentures: These are the debentures which are not redeemed in the life time of the company. Such debentures are paid back only when the company goes into liquidation.
• 5.
  On the basisof Records 1. Registered debentures : These are the debentures that are registered with the company. The amount of such debentures is payable only to those debenture holders whose name appears in the register of the company. 2. Bearer debentures : These are the debentures which are not recorded in a register of the company. Such debentures are transferrable merely by delivery.
• 6.
  On the basisof convertibility (i) Convertible debentures : These are the debentures that can be converted into shares of the company on the expiry of predecided period. (ii) Non-convertible debentures : The debenture holders of such debentures cannot convert their debentures into shares of the company.
• 7.
  On the basisof priority  First debentures : These debentures are redeemed before other debentures.  Second debentures : These debentures are redeemed after the redemption of first debentures.
• 8.
  ADVANTAGES/MERITS OF DEBENTURE ISSUE: It enables a company to raise funds for a specific period.  No dilution of control as debenture holders don’t possess voting rights.  Suitable for conservative investors who seek steady ROI with little or no risk.
• 9.
  DISADVANTAGES/DEMERITS OF DEBENTURE ISSUE •It is risky if the company fails to pay interest or principal installment on time, as debenture holders can file petition for winding up the company. • There is a limit to which funds can be raised through debentures. • It is not suitable for a company with fluctuating earnings as it may also lead to fluctuations in payment of dividend payable to equity shareholders.
• 10.
  DIFFERENCE BETWEEN SHARESAND DEBENTURES SHARES 1. A shareholder is the owner of the company. 2. Shareholder will get a portion of the profits called dividend which is dependent on the profits of the company. It can be declared by the directors of the company out of profits only. 3. Shares cannot be converted into debentures. DEBENTURES 1. Whereas, Debenture holder is a creditor of the company and cannot take part in the management of the company. 2. Debenture holders will get interest on debentures and will be paid in all circumstances, whether there is profit or loss will not affect the payment of interest on debentures. 3. Whereas debentures can be converted into shares.