Sources of Business Finance — OCM STD 11 Commerce — Question
Gujarat BoardEnglish MediumSTD 11 CommerceOCMSources of Business Finance5 Marks
Question
Give the meaning of Debenture and state its characteristics.
✓
Answer
Introduction :
In any business along with own capital. borrowed capital too is there.
Sometimes company needs long term capital.
It expects to repay the amount after stipulated period. Company attempts to collect money through issuing debenture.
Today debenture has gained popularity as a means to collect money.
Investors purchase debenture to earn fixed, regular income.
Meaning of Debenture :
Debenture is the borrowed capital obtained by the company. it is debt of the company.
It can be known as loan also. Like share capital borrowed capital is distributed in certain equal parts. Each part is known as 'debenture'.
Debenture holders are the creditors of the company.
Company gives debt certificate to all its debenture holders. It includes the amount, rate of interest, date of repayment of debenture and other conditions.
Debenture is used as a sources of long term and medium term finance.
Characteristic of Debenture : They are as under :
Creditors of the Company :
Like other creditors debenture holders providing finance to the company are its creditors. Each debenture holder is a creditor of the company.
Charge on Assets :
Company issues debentures and collects finance and for the safety of investment it gives them right over its assets means create liability on assets.
Fixed rate of Interest :
Each debenture holder is paid interest. The rate of interest is mentioned on the certificate issued by the company.
Repayment of Capital on fixed time :
Debenture holder is repaid the money after a certain fixed period.
Repayment of Money by Installment :
As per the terms and conditions laid down by the company, it gives refund of the capital to the debenture holder by installment. e.g.
Debentures are issued for $10$ years and company refund the amount in the last four year in equal installment.
Various types of Debenture :
There are various types of debentures such as debentures with or without security, convertible and non-convertible debenture.
Listing in Stock Market :
If the debenture is listed in stock market then its purchase and sale is carried out in the market.
Time Period :
Normally finance is obtained through long term or medium term debenture.
First preference for payment at the time of dissolution :
When the company is dissolved. capital is refunded to the debenture holders, first before the share capital is refunded.
Conclusion:
In the present days many prestigious and well-established companies issue debentures to meet their financial needs for some period.
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