DEBENTURES AND TYPES DEBENTURES.
Definition of debentures: A debenture may be defined as a bond, acknowledging a loan, generally under the company’s seal and bearing a fixed rate of interest.
It is usually giving security for the repayment of the loan and the payment of the interest.
When an entity issues a debenture, it promises to repay the principal amount (the face value) to the debenture holders at a specified future date, known as the maturity date.
In the meantime, the issuer pays interest to the debenture holders at a predetermined rate, typically on a semi-annual or annual basis.
Debentures are usually unsecured, meaning they are not backed by any specific collateral. Instead, they rely on the general creditworthiness and reputation of the issuer.
However, some debentures can be secured by specific assets of the issuing company.
Debentures can be classified into various types, including convertible debentures, non-convertible debentures, secured debentures, unsecured debentures, and redeemable debentures. Here\’s a brief explanation of these types:
In other words, a debenture is a document setting out the terms of a loan to a company, i.e. a certificate of indebtedness. Holders of debenture cannot share the profit of the company.
The Company Act defines debenture as: “A written acknowledgement of indebtedness by the Company, setting out the terms and conditions of the indebtedness, and includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not.
Types of debentures
Mortgage debentures: A Mortgage debenture is issued on the security of the company’s assets. It gives a charge upon the whole or part of the company’s assets upon liquidation of debentures
A Simple or naked debenture: Where there is no charge created on the
company’s property or assets, the debenture is described as naked or simple. In this case, there is no security for the debenture.
Secured debenture: Secured debenture is the type whose repayment is guaranteed through a collateral security tendered by the borrower.
Redeemable debenture: Redeemable debenture is repayable at a date whit has been fixed or determined. A company may issue debentures which are liable be redeemed.
Irredeemable debenture: Irredeemable debenture is repayable only in the event of some specified contingency, such winding up of the company. It cannot be cashed at any time and it is bought solely
DIFFERENCES BETWEEN A DEBENTURE AND SHARES
|1||A debenture is a certificate of indebtedness||A share is a unit of capital|
|2||It is a loan||It is not a loan|
|3||Interest is credited to the profit and loss account||The holder is a creditor|
|4||Holder receives interest||Holder receives dividend|
|5||Interest is credited to profit and loss account||The holder receives interest before the profit|
|6||A dividend is credited to the appropriation account||The holder is one of the owners|
|7||Entitled to fixed, regular and predetermined payment of interest||Entitled to dividends that may vary will the profits|
limited liability companies
A Convertible Debenture: This debenture can be converted into equity shares of the issuing company at a predetermined conversion ratio and within a specified time frame.
Non-convertible debentures: Unlike convertible debenture, these debentures cannot be converted into equity shares. They remain as debt instruments until maturity.
Secured debentures: This debenture is backed by specific assets of the issuing company. In case of default, the debenture holders have a claim on the collateral.
An Unsecured Debenture: Also known as \”A naked debenture,\” this debenture is not backed by any specific collateral. They rely solely on the creditworthiness of the issuer.
A Redeemable debenture: This debenture is issued with a fixed maturity date, and the issuer agrees to repay the principal amount to the debenture holders on that date.