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.
In other words, 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 from 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: Mortgage debentures are 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.
- Simple or naked debentures: 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 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||Holder is a creditor||Holder is one of the owners|
|4||Holder receives interest||Holder receives dividend|
|5||Interest is credited to profit and loss account||Dividend is credited to appropriation account|
|6||The holder receives interest before profit||Holder will wait for the distribution of distribution profit|
|7||Entitled to fixed, regular and predetermined payment of interest||Entitled to dividends that may vary will the profits|