Sources of Corporate Finance — Secretarial Practice STD 12 Commerce / Arts — Question

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) 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.

(iii) Assurance of repayment:

• Debenture constitutes a long-term debt.
• They carry an assurance of repayment on the due date.

(iv) 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.

(v) 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 a company. It has to be paid whether the company makes a profit or not.

(vi) 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 fixed internal and fixed-rate till redeemed/paid.
• They cannot participate in the management of the company.

(vii) 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.

(viii) 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.