Meaning of Debentures
Debentures are an instrument, an acknowledgement of debt, issued under the common seal of the company which is duly signed by authorized signatory and is an agreement for the repayment of principal sum and interest at a specified rate on a specified date.
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.”
Features of Debenture:
(i) Debenture is an instrument of loan capital which acknowledges the debt of a company.
(ii) Debenture carries a fixed rate of interest.
(iii) The mode (method) and period of repayment of principal amount and interest amount are fixed.
(iv) As per Companies Act, 2013, no company is allowed to isuue debenture having a maturity date of more than 10 years from the date of issue
Difference between Shares and Debenture
|Nature||A share is a part of the share capital of the company.||A debenture is a part of the loan capital of the company.|
|Covertibility||A share cannot be converted in to debenture.||A debenture may be converted into shares.|
|Forfeiture||A share can be forfeited for non-payment of allotment and call money.||A debenture cannot be forfeited for non-payment of allotment and call money.|
|Dividend v/s Interest||A shareholder gets dividend from the company.||A debenture holder gets interest from the company.|
|Risk||A share is always unsecured, hence bears more risk.||A debenture is usually secured, hence bears less risk.|
|Voting Rights||A shareholder gets the right to participate and vote at the Company's meeting.||A debenture holder neither gets any voting right nor can participate in the meetings of the company.|
|Issue at discount||As per section 53 of the Companies Act 2013, shares cannot be issued at discount except sweat equity shares.||There are no restrictions on issue of debentures at discount.|
Difference between Shareholders and Debenture holders
|Status||Shareholders are the owner of the company.||Debenture holders are the creditors of the company.|
|Voting Rights||Shareholders have got the voting right.||Debenture holders have not got the voting rights.|
|Return||Shareholders get dividend as return on their shareholding.||Debentureholders get interest as return an their debentureholdings.|
Type of Debenture:
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 assest 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 realise 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 Debentureholders 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 Coupon Rate –
- Specific Coupon Rate Debentures: Coupon rate is the rate at which interest on debentures is paid. So, if the coupon rate is predetermined, the debentures are said to be Specific Coupon Rate Debentures. The specified coupon rate can be fixed or floating. If it is floating, it depends on the bank rate that is prevailing.
- Zero Coupon Rate Debentures: As the name suggests, these debentures provide zero rate of interest. To compensate investors, such debentures are issued at less than par value, i.e., they are issued a discount and redeemed at par value. This difference between the issue price and the par value forms the interest.