A debenture may be defined as a document issued by a company as evidence of debt. Companies cannot solely depend on equity capital. So, the Company issues loan debentures. A debenture is a type of debt instrument that is secured by assets of the company. Debentures are backed by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond to secure capital. The Debentures provide a fixed rate of interest to the debenture holder. These securities are also known as creditorship securities.
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There are different types of debentures that can be classified into the following categories:
1. Redeemable debentures: These are types of debentures that are repayable after a certain period of time as per the terms of issue. These debentures can be redeemed by the company on demand by the holders or at the discretion of the company.
2. Irredeemable debentures: They are perpetual debentures that do not carry any date of redemption. The debentures that are not repayable during the life time of the company are called irredeemable debentures. They can be redeemed when the company chooses to pay them off to reduce their liability.
1. Convertible Debentures: The debentures, which are convertible into equity shares or preference shares at the command of debenture holders, after a certain period, are called convertible debentures.
2. Non-Convertible Debentures: Non-convertible debentures are simple debentures with no option of conversion into equity. Their state will always remain that of debt and will not become equity at any point in time.
1. Preferred Debentures: The debentures, which are paid first at the time of winding up, are called preferred debentures or first debentures. They are just like preference shares.
2. Ordinary Debentures: Debentures that are paid after the preferred debentures during the winding up of a company are called ordinary debentures.
1. Secured debentures: A secured debenture is a type of debenture which is secured fully or partially by charges on some assets or set of assets of the company.
2. Unsecured debentures: The debentures, which are not secured fully or partially by a charge over the assets of the company, are called unsecured debentures. They are also called Naked Debentures.
1. Registered debentures: The debentures which are payable to the registered debenture holders are called registered debentures. The names of the holders of these debentures with details of the number, value and type of debenture held are recorded in the register of debenture holders.
2. Bearer debentures: Bearer debentures are the ones that are payable to the bearer and can be transferred by mere delivery. The register of debenture holders does not have the names of the debenture holder recorded. Registration of transfer of these types of debentures is not necessary. Bearer debentures are also called Unregistered Debentures.
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Listed below are some of the salient features of debentures:
The company is liable to pay periodic interest payments to the Debenture holders at an agreed rate.
They are also entitled to redemption of their capital as per the agreed terms.
A debenture holder has no voting rights and cannot vote in the company’s general meeting.
Debentures can be secured against the assets of the company or may be unsecured.
A debenture acknowledges a debt. It is in the form of certificate issued under the seal of the company.
Debenture holders have the right to take legal action against the company on any unpaid dues.
They can enforce the security by sale in case of default.
The interest paid by the company to the debenture holder is a charge against the profit in the company’s financial statement.
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Discussed below are some of the advantages of debentures:
Secured investments: Debentures are a type of secured investment option and provide security to the investors.
Fixed return: Debentures are a debt instrument that are issued under the seal of a company that guarantees a fixed rate of interest to be paid on the due date.
Stable prices: Prices are more stable as compared to shares because the changing market conditions don’t affect debentures.
Non-interference in management: The debenture holders have no voting rights and they cannot vote in the company’s general meeting of shareholders.
Economical: It is cost effective compared to other forms of lending. The rate of interest is generally lower which makes them a good investment.
Availability of funds: The companies can raise money through debentures easily compared to equity and preference shares.
Regular source of income: The investors get fixed and regular interest, whether the company earns profit or not.
The following are the limitations of Debentures.
Permanent burden of interest: Interest on debentures must be paid irrespective of the profits of the company. As far as the company is concerned, there is no flexibility in their obligation to make interest payments on the debenture. In times of financial difficulty, this can compromise business growth, and even force insolvency in some cases.
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