A company requires funds at various junctures- when starting business, when expanding business, for a particular project and so on. A joint stock company can issue equity to raise the required funds. It can also opt for borrowing from the public by issuing debentures, accepting deposits and so on.
What is a Debenture?
A debenture is a certificate issued by a company, bearing its seal, acknowledging a debt due to its holder. It is similar to a bond, the difference being that a bond can be issued without a predetermined rate of interest. A debenture has to have the rate of interest specifically mentioned.
Some Features of a Debenture:
- A debenture represents a debt owed by the company and debenture holders are the company’s creditors.
- Debenture holders are paid a fixed rate of interest by the company.
- A debenture is generally repayable after a fixed period.
- A debenture holder has no voting rights regarding any matter pertaining to the company.
Various Types of Debentures:
On the basis of Security:
- Secured or mortgage Debentures: These debentures are secured by a fixed or floating charge on the assets of the company.
- Unsecured or Naked Debentures: These debentures do not have any charge on the company’s assets.
On the basis of Convertibility:
- Convertible Debentures: These debentures can be converted to equity or preference shares in the future at the discretion of the company.
- Non-convertible Debentures: These debentures cannot be converted to any other instrument.
On the basis of Transferability:
- Registered Debentures: When the name of the debenture holder is specifically mentioned on the debenture certificate, it is called a registered debenture. This is not a negotiable instrument.
- Bearer or Unregistered Debentures: These debentures do not have any name on the certificate and are negotiable instruments.
On the basis of Redeem Ability:
- Redeemable Debentures: These debentures can be redeemed by the company after a specified period.
- Irredeemable Debentures: These debentures will not be repaid during the lifetime of the company and are repayable only in the event of liquidation of the company.
Differences between a Share and a Debenture:
- A share is a part of ownership capital while a debenture is a part of borrowed capital.
- A shareholder has got voting rights in matters pertaining to the company. A debenture holder has no such rights.
- A shareholder is paid dividend while the debenture holder is paid interest.
- Dividends are generally paid to shareholders only when the company makes profits. Debenture interest has to be paid irrespective of whether the company makes profit or loss.
- A shareholder has no charge on the assets of the company. A debenture holder generally has a charge on the assets of the company.
- On the event of liquidation of the company, the claim of the debenture holders comes prior to the claim of shareholders.
Debentures may be issued on par, at a premium are at a discount.
Redemption of a Debenture May Take Place:
- On maturity or even earlier depending on the terms of the debenture
- By purchase in the open market, generally when the market price is below the par value
- On conversion to a share