DEBENTURES

F-7

JENICE VICTORIA CRASTO

F 17 SHAILA JOSEPH JAMES

F - 19 SHWETA VIJAY WAINGANKAR
F 22 JYOTSHANA VINOD PARMAR

DEBENTURES

Debenture is a creditor ship security. It is a document that creates or

acknowledge a debt. The debenture holder is entitled to get a fixed rate of
interest.
The Companies Act Defines debenture as debenture stock
,bonds and any other securities of a company, whether
constituting a charge or not.

PURPOSE OF ISSUING
DEBENTURES

For setting up a new project.

Expansion or diversification of Existing project.

Normal capital expenditure for modernization.

Merge/Amalgamation of companies.

FEATURES

Date of Maturity: For all the non convertible and redeemable debentures, the issuing
company has to issue repayment to the debenture holders on the date of maturity. This date
is also mentioned on the certificates and it infers the total time for which the money is
invested by the lenders which is interval between the date of issue to the date of maturity.

Charge on Assets and Profits in case of Default: The debenture holders may have
claims over the profits and assets of the company in case the company has defaulted in the
payment of either the interest or the capital repayment.

Convertibility: Certain types of debentures are issued with the option of conversion into
equity. The ratio of conversion and the time period after which conversion will take place is
mentioned in the agreement of debenture. Debentures may be fully or partly convertible in
nature.

Debenture holders are not the owners of the company. They are considered the
creditors of the corporation or in other words, the company borrow money from
them through issuing debenture.

No voting rights: The debenture-holder is not a shareholder and cannot vote in

the company's general meetings.

Fixed rate of interest: A debenture with a fixed charge has a fixed rate of
interest. It can be presented as "10% Debenture". They are always unsecured
and earns a fixed rate of interest but has no share of the profit.

Control: Since, debentures holders are creditors of the company and not its
owners, they do not have any control over the management of the company.
They do not have any voting rights to elect the directors of the company or on
any other matters. But, at the time of the liquidation of the company they have
prior claim over share holders and if remain unpaid, they may take control over
the company.

TYPES
I.

Secured debentures.

II.

Unsecured debenture.

III.

Redeemable debentures.

IV.

Perpetual debentures.

V.

Convertible debenture.

VI.

Non-convertible debenture.

VII.

Coupon rate debenture.

VIII.

Zero coupon debenture.

IX.

Registered debenture.

X.

Bearer debenture

Those debentures which are secured on particular assets

called secured debenture. These debenture are also
called known as Mortgage debenture

Unsecured debentures are those which are not

secured fully or partially by a charge on asset.
General solvency of the company is the only
security for their holders. These are also called
naked debenture or simple debenture.

Debentures which are repayable after a

stated period of time are called redeemable
debenture. Debentures issued by companies
are generally of this type.

Debentures which are not repayable during

the life time of the company are called
irredeemable debenture. the company may
repay the money at the time of liquidation or
on the happening of a contingency or after
the expiry of a very long period

Debentures which are convertible in to shares or securities at the

option of the holders, after a certain period , are called convertible
debentures.
Convertible debentures are two types ;
1.Fully convertible debentures.
2.Partly convertible debentures.

Debentures which are not convertible into Shares or other

securities of the company are called non-convertible
debentures

Debentures are usually issued with a specified rate of interest .This

specified rate is called Coupon rate .It may be either fixed or
floating .The floating interest is usually linked with the bank rate
and yields on treasury bond plus a reward for risk

A zero coupon bond is one which does not carry a specified rate of
interest. In order to compensate the investors such bonds are
issued at a substantial discount .The difference between the face
value and issue price is the total amount of interest related to the
duration of the bond.

These are debentures which are payable to the registered

holders. The names of the holders of these debentures appear
both on the debenture certificate and in the companys register
of debenture holders.

Debentures which are payable to the bearer are called bearer

debentures .The names of the debenture holders are not recorded
in the register of debenture holders. They are treated as
negotiable instruments and as such they are transferable by mere
delivery.

A document created by the company regarding the appointment of

trustee's in order to protect the interests of debenture holders before
they are offered for public subscription
The following are those eligible to be a debenture trustee
a) A scheduled bank
b) A public financial institution according to sec 4 A (1) of companies
act 1956
c) An insurance company
d) A body corporate

ADVANTAGES OF DEBENTURE
ISSUE
1.
2.
3.

It enables a company to raise funds for a specific period.

No dilution of control as debenture holders dont possess voting rights
Debenture (debt) enables the company to Trade on equity. It can pay dividend to equity
shareholders at a rate higher than overall ROI.

4.

Debenture holders entitled to a fixed rate of interest. E.g.: 10% debenture

5.

They enjoy priority over other unsecured creditors with respect to debt repayment.

6.

Suitable for conservative investors who seek steady ROI with little or no risk.

7.

Interest on debentures is treated as expense and is tax deductible.

8.

Company can adjust its gearing in accordance to its financial plan.

DISADVANTAGES OF DEBENTURE ISSUE

1.

They have a fixed maturity; hence provision has to be made for repayment.

2.

There is a limit to which funds can be raised through debentures.

3.

It is risky if the company fails to pay interest or principal installment on time, as debenture holders can
file petition for winding up the company.

4.

It is not suitable for a company with fluctuating earnings as it may also lead to fluctuations in payment of
dividend payable to equity shareholders.

5.

With more risk, you get more return. Debentures being secure investments, returns are less.

6.

Like ordinary shares, debenture holders will not be regarded as owners of the company and have no
voting rights.

7.

Debenture financing enhances the financial risk.

8.

Common people cannot buy debenture as they are of high denominations

THANK YOU..!