IGNOU SOLVED ASSIGNMENTS

Debentures and It's Features

Debentures

A debenture is a document issued by a company as an evidence of a debt due from the company with or without a charge on the assets of the company. It is an acknowledgement of the company's indebtedness to its debenture-holders. Debentures are instruments for raising long term debt capital. They are repayable after a fixed period. Debenture holders get interest on their debentures. They are also entitled to redemption of their capital as per the agreed terms. No voting rights are given to debenture-holders. Under section 117 of the Companies Act, 1956, debentures with voting rights cannot be issued. Usually debentures are secured by charge on or mortgage of the assets of the company. Debenture holders are the creditors of the company.

According to Sec. 2 (12) of the companies Act, 1956, debentures include “debenture stock, bonds and any other securities of a company”.

Features of Debentures

A debenture is a long-term, fixed-income; financial security debenture holders are the credit ion of the firm. The par value of a debenture is the face value appearing on the debenture certificate. Corporate debentures in India are issued in different denominations. The large public sector companies issue bonds in the denominations of Rs. 1,000.

1.       Interest rate: - the interest rate on a debenture is fixed and known. It is called the contractual rate of interest. It indicates the percentage of the par value of the debenture that will be paid out annually (or semi-annually or quarterly) in the form of interest.

2.       Maturity:- debentures are issued for a specific period of time the maturity of a debenture indicates the length of time until the company redeems (returns) the par value to debenture-holders and terminates the debentures, In India, a debenture is typically redeemed after 7 to 10 years in installments.

3.       Redemption: - as indicated earlier, a debenture is mostly redeemable; they are generally redeemed on maturity. Redemption of debentures can be accomplished either through a sinking fund or buy-back (call) provision.

4.       Sinking fund: - a sinking fund is cash set aside periodical for retiring debentures. The find is under the control of the trustee who redeems the debentures either by purchasing them in the market or calling them in an acceptable manner. In some cases, the company itself may handle the retirement of debentures using the sinking funds.

5.       Buy-back (call) provision: - debenture issues include buy-back precision. But-back provisions enable the company to redeem debentures at a specified price before the maturity fate. The buy-back (call) price may be more than the par value of the debenture. This difference is called call or buy-back premium. In India, it is generally 5 per cent of the par value.

6.       Indenture: - an indenture or debenture trust deed is a legal agreement between the company issuing debentures and the debenture trustee who represents the debenture holders. It is the responsibility id the trustee to protect the interests of debenture obligation. Generally, a financial institution, or a bank, or an insurance company or a firm of attorneys is appointed as a trustee.

7.       Security: - debentures are either secured or unsecured. A secured debenture is secured by a lien on the company’s specific assets. If the company defaults, the trustee can seize the security on behalf of the denture holders. In India, debentures are usually secured by a charge on the present and future immovable assets of the company. This is called equitable mortgage.

8.       Yield: - the yield on a debenture is related to its market price; therefore, it could be different from the coupon rate of interest. Two types of yield could be distinguished. The current yield on a debenture is the ratio of the annual interest payment to the debenture’s market price. For example, the current yield of a 14 per cent. Rs. 1,000 debenture currently selling at Rs. 750 is Current yield = annual interest / market price = 140 / 750 = 0.187 or 187 percent

9.       Claims on assets and income: - debenture holders have a claim on the company’s earnings prior to that of the shareholders. Debentures interest has to be paid before paying any dividends to preference and ordinary shareholders. A company can be forced into bankruptcy if it fails to pay interest to debenture holders. Therefore, in practice, the debenture holders’ claim on income airs generally honoured except in the case of extreme financial difficulties faced by the company.