- A debenture is one of the main sources of raising debt capital for meeting long-term and medium-term financial needs.
- Debentures represent borrowed capital.
- A person who purchases debenture is called a debenture holder.
- The holders get a fixed rate of interest as a return on their investment.
- The Board of Directors has the power to issue debentures.
Definitions:
Topham defines: “A debenture is a document given by a company as evidence of debt to the holder, usually arising out of the loan and most commonly secured by the charge.”
A debenture is evidence of indebtedness.
Features of Debenture:
(i) Written Promise:
- A debenture is a written promise by a company that it owes a specified sum of money to the holder of the debenture.
(ii) Face Value:
- The face value of debenture normally carries a high denomination.
- It is ₹ 100 or multiples of ₹ 100.
(iii) Time of payment:
- A debenture is issued with the due date stated in the Debenture Certificate.
- It provides for repayment of the principal amount on the maturity date.
(iv) Priority of Payment:
- Debenture holders have a priority in repayment of their capital over other claimants of the company.
- The amounts of debentures are settled before shareholders.
(v) Assurance of repayment:
- Debenture constitutes a long-term debt.
- They carry an assurance of repayment on the due date.
(vi) Terms of issue and redemption of Debenture:
- Debenture can be issued at par, premium, and even at discount.
- Its redemption takes place only at par and premium.
(vii) Authority to issue:
Board of Directors has the authority/power to issue debenture as per Companies Act 2013 Section 179(3).
(viii) Interest:
- A fixed-rate of interest is agreed upon and is paid periodically.
- The rate of interest that a company pays/offers depends upon the market conditions and nature of the business.
- Payment of interest is a liability of the company. It has to be paid whether the company makes a profit or not.
(ix) Parties to Debenture:
- Company: This is an entity that borrows money.
- Trustees: The company has to appoint Debenture Trust if it is offering debenture to more than 500 people.
- Trust is a party through whom the company deals with debenture holders and enters into an agreement known as Trust Deed.
- Trust Deed contains obligations of the company rights of debenture holders, power of trustees, etc.
- Debenture holders: They are the parties who provide loans to the company and receive a ‘Debenture Certificate’ as evidence.
(x) Status of debenture holder:
- The debenture holder is a creditor of the company.
- Debenture being loan taken by the company interest is payable on it at a fixed interval and fixed-rate till redeemed/paid.
- They cannot participate in the management of the company.
(xi) No Voting Right:
- According to sec. 71 (2) of Companies Act 2013, no company shall issue debenture carrying voting rights.
- Debenture holders do not have the right to vote in the general meetings of the company.
(xii) Security:
- Debenture can be secured with some property of the company by fixed or floating charge.
- Debenture holders can sell of charged property of the company and recover their money if the company is not in a position to make payment of interest or repayment of capital.
(xiii) Issuers:
- Debenture can be issued by both, private as well as public limited companies.
(xiv) Listing:
- A debenture must be listed with at least one recognized stock exchange.
(xv) Transferability:
- Debentures can be easily transferred through instruments of transfer.