A debenture is a document containing a acknowledgment of debt. In other words, debenture is like certificate of loan or a loan bond, which evidences this fact that company is liable to pay a specified amount with interest. In fact, company raises money in form of loan through debentures. Although such money becomes a part of company’s capital structure, yet it does not become share capital.
Debentures can be defined as that document, which is issued by company to lender for borrowing some money. And such document consists of a contract through which company owes to repay borrowed amount along with interest to lender at some specific time.
Contents of Debentures
The following are the contents of debenture
i. Rate of Interest
There shall be stated in it the rate of interest.
ii. Term of Redemption
There shall be stated in it the terms of redemption or conversion in it, that when and on what conditions redemption is possible and what conditions are necessary to comply with.
iii. Redemption’s date
There shall be stated in it the earliest dates on which the debentures may be redeemed or company or holder thereof may convert into shares. Debenture holder, if desires, may become the share holder of the company by changing his debenture into shares. He will be entitled to profit from it and not debt.
There shall be stated in it the particulars of any redeemed debentures where the company has power to re-issue.
v. Sinking Funds
There shall be stated in the detail of sinking funds if they exist.
Characteristics of Debentures
Following are the characteristics of debentures
- It is a document containing a acknowledgment of debt.
- It is issued to the money lender under the seal of the company.
- It helps a company to raise its capital or to make up deficiency in its capital account.
- It represents the debt of the company
- It gives a right to debenture holder to enjoy interest at fixed rate.
- It provides a guarantee that principal amount shall be paid on the specified date.
- It creates security for repayment of loan.
Period of DebenturesThe period for which debentures are issued is as under
- They may be issued for fixed term of years.
- They may be made payable on demand.
- They may be issued perpetually.
- They may be made irredeemable.
- They may be made redeemable on the happening of a contingency.
Kinds of Debentures
There are several kinds of debentures, of which the most usual are.
i) Debenture payable to Registered Holder
These are not negotiable instruments. They are transferable only in a manner specified in the conditions endorsed thereon. The transferee takes them subject to all claims which the company may have against all prior holder at the date of the transfer.
(ii) Debenture payable to bearer
These are negotiable instruments, and consequently a transferee in good faith and for value takes them free from any defect in the title of a prior holder. They are transferrable by delivery.
(iii) Redeemable Debentures
The amount of these debentures are payable after a stated period. These are issued subject to the condition that the company shall redeem them on specified date. These debentures are very common now days.
(iv) Perpetual Debentures
Debentures are not invalid simply because they are irredeemable or redeemable on the happening of a contingency, however remote, e.g. the windingup of the company or on the expiration of a period; however long. A perpetual or irredeemable debenture is in fact an annuity in perpetuity to the holder. (Section, 115).
v. Simple or naked debentures
It is one which only amounts to an acknowledgements of indebtedness or is coupled with an undertaking to pay the principal and interest till payment. There is a security, and the debenture holder is an ordinary, unsecured creditor.
vi. Mortgage debentures
It is one which not only recognizes the company’s indebtedness but also creates a charge on its assets or property. It is necessary that a debenture creating a charge, whether floating or fixed, over any immovable property should be registered according to the provisions of the section 17 of the registration Act in addition to the provisions of the companies ordinance.
To conclude I can say, debentures are bounds or deeds which evidence the load, create security for its repayment. They usually consists of two parts viz, (i) the body of instrument containing the bound and the charge and (ii) the conditions endorsed thereon. In a nutshell I may say that debenture includes debenture stock, bonds and any other securities, other than a share of a company, whether constituting a charge on the assets of the company or not.