Define debenture? What are its characteristics?

Define debenture? What are its characteristics? Describe various kinds of debenture.

Ans.

MEANING OF DEBENTURE

The word debenture has been derived from the Latin word ‘debere’ which means to owe. A debenture is a bond, usually under the Common Seal of the Company and secured by a charge on the Company’s property or undertaking, bearing a fixed rate of interest and being either repayable within a specified period or on a specified date or irredeemable during the existence of the Company. According to justice Whity, “Debenture is a document which either creates a debt or acknowledges it.” This interpretation of a debenture has been accepted by the Bombay High Court in 1946. Whenever a Company is in need of a loan for a long period, it mostly issues debentures for the same. Debenture is an undertaking of the Company in writing for acknowledging a debt and containing a contract for the payment of the principal sum at a specified date and for the payment of interest (usually half-yearly) at a fixed rate of interest.

Definitions of Debenture:

Section 2(30) of the Companies Act, 2013 lays down that “debenture” includes debenture stock, bonds or any other instrument ol a company evidencing a debt, whether constituting a charge on the assets of the company or not.

According to Justice Chitty, “Debenture means a document which either creates a debt or acknowledges it and any document which fulfils either of these conditions.”

As per Palmer, “A debenture is an acknowledgement of a debt, given under the seal of the company and constituting a contract for the payment of principal sum on a specific date and for the payment of interest at a fixed rate percent, until the principal sum is repaid and it may not or may not create a charge on the assets of the company as security for the loan. Usually it gives a charge by way of security.”

FEATURES/CHARACTERISTICS OF DEBENTURE

The main characteristics of debentures are as follows:

1. Debenture is an acknowledgement of debt by the company to its holder.

2. Debenture is a written document issued by the company.

3. Interest on debentures is payable normally after six months, whether the company makes a profit or not.

4. The rate of interest, term, method of redemption etc, are predetermined.

5. It is a contract for the repayment of principal and its interest at a specified date and rate.

6. It can be issued at par, at discount or at premium.

7. Debentures are the creditors’ equity, hence it appears in the liabilities side of the balance sheet under the heading Long-term Liabilities.

8. It is normally secured by a floating charge on the assets of the company.

9. A company can purchase its own shares as an investment.

10. Debentures cannot be forfeited. The company can only sue the debenture holder for any balance due.

Kinds of debentures

I. On the basis of Negotiability or Transferability or Record:

(1) Registered Debentures: The debentures which are entered in the books of the Company and payable to the registered holders are called registered debentures. The interest is also payable to the registered holders. Registered holders cannot transfer the debentures without adopting the procedure which is laid down in the law.

(2) Bearer Debentures: The debentures which are payable to the bearer thereof are called bearer debentures. Its interest is paid to its holder. They can be transferred without performing legal formalities.

II. On the basis of Security:

(1) Secured or Mortgaged Debentures: The debentures that are secured by a charge on the assets of the Company are known as Secured or Mortgaged debentures. If default is made on due date, the debenture holder can realize his amount from the assets charged.

(2) Unsecured, Simple or Naked Debentures: The debentures for whose payment of principal and interest, no security is given are known as unsecured, simple or naked debentures. Such debentures are only acknowledgement of indebtedness of the Company under its Common Seal.

III. On the basis of Redemption:

(1) Redeemable Debentures: The debentures which are repayable after a fixed period are known as redeemable debentures.

(2) Irredeemable Debentures: The debentures which are not repayable during the lifetime of the Company issuing them are known as irredeemable debentures. These debentures are also called perpetual debentures. They are repayable only when the Company goes into liquidation.

IV. On the basis of Convertibility:

(1) Convertible Debentures: Convertible debentures are those debentures wherein the debenture holders is given an option to exchange a part or whole of the debentures amount for equity shares in the company on the expiry of a specified period. Some companies issue convertible debentures wherein a part or whole of the debentures amount, after the specific period is compulsorily, converted into equity shares of the company; but when the full amount of the debentures is convertible into equity shares such debentures are known as ‘Fully Convertible Debentures’.

(2) Non-convertible Debentures: When debenture holders have no right to convert their debentures into equity shares, those debentures will be called as non convertible debentures. Holders of such debentures have to retain the debentures, till such time as they are paid.

V. On the basis of Coupon Rate (Interest)

(1) Specific Coupon Rate Debentures: When debentures are issued with a pre-determined rate 01 interest i.e., called The coupon rate, they are called specific coupon rate debentures. This rate may be fixed or floating, the floating interest is usually tagged with the bank rate. This type of debentures are generally issued by the companies.

(2) Zero Coupon Rate Debentures (Bonds): These debentures do not carry a specific rate of interest. In order to compensate the investors, such debentures are issued at substantial discount and the difference between nominal value and the issue price is treated as the amount of interest related to the duration of the debentures.