Introduction to Debentures

A debenture is defined as a certificate of agreement of loans which

is given under the company's stamp and carries an undertaking that the debenture holder will get a fixed return (fixed on the basis of interest rates) and the principal amount whenever the debenture matures.

Characteristics
Debenture Holder are the creditors of the company. They are fixed interest debt instruments with varying period of

maturity. When offered for subscription a debenture redemption reserve has to be maintained. If listed on the stock exchanges, they should be rated prior to the listing by any of the credit rating agencies designated by SEBI.

Types of Debentures
A. SECURITY :

Secured & unsecured B. CONVERTIBILITY: y Fully Convertible & Non convertible C. TENURE : y Redeemable & Non-Redeemable D. RECORDS: y Registered & Bearer: Whose name is registered in debenture holder book and bearer means debentures issued by company without keeping any records.

Merits
y No dilution of control y Long term finance y Tax Benefit y Investors safety

Demerits
y Fixed obligation y Charge on assets y No voting Rights

Differentiation
Debentures Creditors of the company Shares Owners of the company

Have no voting rights and no consequent Have voting rights and consequent control of the company control of the company Interest is paid at a predetermined fixed rate On basis of Security, tenure, Convertibility, Records. Can be converted into shares On liquidation they are paid first Dividend on equity is paid at variable rate depending on profits Equity shares and preference shares Can not be converted into debentures On liquidation paid after paying debentures and creditors