Sources Of Finance

Debentures…

 The word ‘ debenture’ is derived from the Latin word ‘

debere’ which means ‘ to owe’. Thus debenture means ‘an
instrument in writing issued by a company under its
common seal, acknowledging its indebtness for certain
sum of money and undertaking to repay it on or after a
fixed future date’.

 It is an instrument used by companies to raise loan capital.

 Interest is paid to debenture holders at a fixed rate at

regular intervals.
 Definition

According to section 2(12) of the Companies Act

1956, Debenture includes debentures, stock, bonds
and any other securities of a company or not”.

Debenture being a form of loan, interest is payable

on the same at certain rate per annum at stated
intervals.

The holders of a debenture is not a member of the

company but merely a creditor.
 Characteristics Of Debentures

 It is issued by a company and is usually in the form of a

certificate, which is an acknowledgement of indebteness

 A debenture holder is a creditor of the company. It is

creditor ship security.

 The rate of interest payable on debentures is fixed, whether

or not the company has made a profit.

 A debenture holder does not have any right to vote in the

company meetings.
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It generally creates a charge on the assets of the

company. But there may be debentures without any
such charge.

Debentures may be issued at par, at premium, or at

discount either privately or through a prospectus.
 Types of Debentures

I) On the basis of Security

i) Secured Debenture.
Ii)Unsecured Debenture.

Secured Debentures: These debentures are secured by a charge

upon some or all assets of the company. There are 2 types of
charges: i) Fixed Charge, ii) Floating charge.
A fixed charge is a mortgage on specific assets. These assets
cannot be sold without the consent of the debenture holders.
A floating charge generally covers all the assets of the company
including future one.
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Unsecured debentures : These debentures are not secured by

any charge upon any assets. A company merely promises to pay interest
on due dates and to repay the amount due on maturity date. These
types of debentures are very risky from view point of investors.
 On the basis of Permanence

Redeemable Debentures: The debenture which are repayable

on the expiry of a certain period are called redeemable debentures.
 In time, the debentures may be redeemed by the company on demand
by the holders or at the discretion of the company.

 Irredeemable Debentures: A debenture will be treated as

irredeemable when there is no fixed for repayment of the principal
amount.
 These debenture are retained as a part of the permanent capital
structure of the company.
 These debentures are called perpetual debentures.
 On the basis of Convertibility

Convertible Debentures: These are debentures which

will be converted into equity shares after a certain
period of time from the date of issue.

Non- Convertible Debenture : These debentures

which cannot be converted into shares in future. As
per the terms of issue these debentures are repaid.