Meaning
of Debentures
According
to Sec. 2 (12) of the companies Act, 1956, debentures include “debenture stock,
bonds and any other securities of a company”.
Debentures
are debt instruments issued by a joint stock company. Amounts collected by way
of debentures form part of the loan capital of a company. They are repayable
after a fixed period. Debenture holders get interest on their debentures. They
are creditors of the company. They do not get dividend. Only shareholders get
dividend.
The characteristics of
debentures can be summarised as follows:
a) Debentures are debt instruments.
b) They generally carry fixed rate of interest.
c) They are normally repayable at the end of a fixed period. Repayment of
debenture or cancellation of debenture liability in the books of the company is
known as redemption of debentures.
d) They can be issued at par, premium or at discount depending on the
reputation of the company.
e) They can either be placed privately or offered for public subscription.
f) They may or may not be listed in the stock exchange.
g) If offered for public subscription, they should be rated by a credit
rating agency approved by SEBI, prior to listing.
h) Interest is payable on debentures at a fixed rate irrespective of the
profit earned by the business.
i) Debentures may be issued with or without the security of assets of the
company.
j) In the event of winding up of the company the debenture holders are
treated as creditors and given priority in repayment of their money.
k) Debenture holders normally do not have representation in the Board of
the company.
Debentures are classified as
follows:
1. On
the Basis of Repayment
a.
Redeemable Debentures: These debentures are paid off or redeemed after the
prescribed period.
b.
Irredeemable or Perpetual Debentures: These debentures are permanent debentures
of a company. They are paid back only in the event of winding up of a company.
2.
On the Basis of Transferability
a. Registered Debentures: These are debentures for which the company
maintains record of debenture holders. Therefore when such debentures are sold
or transferred it should be intimated to the company for making change in the
register of debenture holders.
b. Bearer Debentures: These debentures are transferable by mere
delivery. There is no need or registration of transfer with the company.
3.
On the Basis of Security
a. Simple
or Naked Debentures: These are debentures not secured by any asset of the
company. If the company goes into liquidation these debentures are treated as
unsecured creditors.
b.
Mortgage Debentures: Mortgage debentures are issued on the security of certain
assets of the company. They can be secured by fixed assets or floating assets
of the company.
4. On
the basis of Conversion
a.
Convertible Debentures: These debentures are issued with an option to debenture
holders to convert them into shares after a fixed period. Convertible
debentures are either partially convertible debentures or fully
convertible debentures.
b. Non
Convertible Debentures: These are debentures issued without conversion option.
The total amount of the debenture will be redeemed by the issuing company at
the end of the specific period.
5. On
the Basis of Pre-Mature Redemption Rights:
a. Debenture with “Call” option: A callable debenture is one in which
the issuing company has the option of redeeming the security before the
specified redemption date at a pre-determined price.
b. Debenture with “Put” option: This is a debenture in which the holder
has the option of getting it redeemed before maturity.
6. On
the Basis of Coupon Rate (interest rate)
a. Fixed Rate Debentures: Most of the time debentures are issued with a
prefixed rate interest. These debentures are called fixed interest debentures
b. Floating rate Debentures: Floating rate as the names suggests keeps
changing.
c. Zero Coupon Bonds: These are debentures issued with no interest
specified. They are issued at a substantial discount to compensate the
investors. These bonds are known as deep discount bonds.
Difference
between Shares and Debentures
Basis
of Difference
|
Shares
|
Debentures
|
1. Ownership
|
Shareholders are
the owners of the Company.
|
Debentureholders
are the Creditors of the Company.
|
2. Repayment
|
Normally, the
amount of share is not returned during the life of the company.
|
Debentures are
issued for a definite period.
|
3. Convertibility
|
Shares cannot be
converted into debentures.
|
Debentures can
be converted into shares.
|
4. Restrictions
|
There are legal
restrictions to be fulfilled to issue shares at a discount.
|
There are no
restrictions on the issue of debentures at a discount.
|
5. Purchase
|
A company can
buy back its own shares, but subject to fulfillment of stipulated conditions.
|
A Company can
purchase its own deben – tures from the market without any conditions.
|
6. Forfeiture
|
Shares can be
forfeited for non-payment of allotment and call monies.
|
Debentures
cannot be forfeited for non-payment of call monies.
|
7. Payment
of dividend/ Interest
|
Shareholders
will get dividend which is dependent on the profits of the company.
|
Debentureholders
will get interest on debentures and will be paid in all circumstances,
whether there is profit or loss.
|
Difference
between Shareholders and Debentureholders
Basis
of Difference
|
Shareholders
|
Debentureholders
|
1. Status
|
Shareholders are
the owners of the company.
|
Debentureholders
are the creditors of the company.
|
2. Return
|
A shareholder
gets dividend.
|
A Debenture
holder gets interest on his investment at the rate stated whether or not there
is a profit to the company.
|
3. Control
|
A shareholder
has a right to control over the working of the company.
|
A Debenture
holder has no such right to control.
|
4. Risk
|
Shareholders are
at a greater risk. Even they can lose the amount invested in the shares.
|
Debenture
holders are relatively safe. Secured debenture holders have almost no risk.
|
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