Corporate Law

47

19 – DEBENTURES

Introduction
A debenture is an instrument used by a lender, such as a bank, when providing capital to companies.
It enables the lender to secure loan repayments against the borrower’s assets. A debenture can grant a
fixed charge or a floating charge. A fixed charge is normally taken out against a tangible asset such
as property. A floating charge usually attached to assets such as shares, raw materials etc. It enables
the lender to take ownership of the borrower’s assets and sell them off in the event of a payment
default.

Definition
 Debenture includes debenture stock, bonds, term finance certificates and any other securities,
other than a share, of a company, whether constituting a charge on the assets of the company
or not.

 It is a document acknowledging a debt against company which is issued by the company

under common seal of the company and contracting to pay principal along with interest up to
a specified time.

Characteristics of debenture
1. A debenture is a movable property and may be transferred by the holder as per debenture
deed.
2. It is usually in the form of a certificate.
3. It creates a debt and contains an acknowledgement of the issuer.
4. It is an obligation of the issuer to repay the amount specified therein.
5. It specifies the term of the instrument and generally mentions the redemption date.
6. It contains an undertaking of the issuer regarding repayment of the principal amount and the
interest thereon.
7. Generally it constitutes a charge on the assets of the issuer. However, it may not create any
charge on the assets.
8. It usually specifics a particular date of repayment.

Kinds of Debentures
1. Bearer Debenture
The debentures which are payable to bearer and whose names do not appear in the register
of debenture holders are known as Bearer Debentures. Bearer Debentures are transferable by mere
delivery. The company keeps no record of such debenture holders. Interest is paid to the holders as it
falls due.

2. Registered Debenture
Registered debentures are recorded in the company's debenture-holders' register with full details of
every debenture holder. Registered debentures are not negotiable. These cannot be transferred to
other person unless the regular instrument of transfer is sanctioned by the directors of the company.

3. Redeemable Debenture
A debenture which is issued for a specified time period and shall be redeemed as per terms contained
in the debenture deed. It may be redeemable on the happening of certain event.

4. Irredeemable Debenture
Debenture which is not repayable during life time of the company i.e. repayable only at the time of
liquidation.

JAMSHAID IFTIKHAR
M.Phil Commerce & Finance
Corporate Law
48

5. Secured Debenture
Such debenture which constitutes a charge against the assets of the company is known as secured
debentures.

6. Unsecured Debenture
Debenture which has no security or does not constitute a charge against the assets of the company is
called unsecured debenture.

7. Convertible Debenture
It is such a type of debentures which may be converted into ordinary shares of the company on the
expiry of a certain term or on the happening of a certain event.

8. Non-Convertible Debenture
A debenture which is not capable of being converted into share capital of the company is termed as a
non-convertible debenture.

ISSUE OF DEBENTURES
Debentures can be issued at any time by a company. The power to issue debentures rests with the
Board of Directors. Debentures may be issued at par, at a premium or at a discount.

Procedure for issue of Debentures

The procedure for the issue of debentures is as follows:
1. First of all a Board meeting is convened at which the decision to issue debentures, is
taken and pass a resolution to that effect.
2. The directors appoint a committee of directors to arrange for the preparation of the
prospectus.
3. After passing Board resolution the committee of directors prepares report and places it
before the Board within the prescribed period.
4. The draft of debenture deed, the trust deed and the prospectus is approved by the
directors.

JAMSHAID IFTIKHAR
M.Phil Commerce & Finance