A debenture in company law is a type of bond or other debt instrument that is unsecured by collateral. Since debentures have no collateral backing, they must rely on the creditworthiness and reputation of the issuer for support.
Full Answer
What are debentures under the Companies Act?
The Companies Act provides an expansive definition of debentures rather than an exhaustive definition. According to Section 2 (30) of the Companies Act 2013, the company has the authority to issue bonds or debentures, which are debt instruments that can be both secured and unsecured by establishing a fee on the company’s assets.
What is debenture deed?
Debentures are instruments of debt, which means that debenture holders become creditors of the company. They are a certificate of debt, with the date of redemption and amount of repayment mentioned on it. This certificate is issued under the company seal and is known as a Debenture Deed.
What is a debenture holder?
A person who purchased and holds a debenture is called a debenture holder who becomes the creditor/ charge holder of the company a debenture is a document that bears the company’s seal and is issued by it. A debenture is a document that acknowledges the fact that the company has earned funds in the sum of the debenture’s nominal value.
What is the difference between debentures and shares?
The basic distinction being, when one buys the shares of the company he becomes the part-owner of the company, but when one buys debentures issued by the company he becomes a creditor to the company. We can conclude that debenture is a kind of formal loan given to the company by another individual.
What is meant by debentures in company law?
A debenture is a written instrument acknowledging a debt under the common seal of the company. It contains a contract for repayment of principal after a specified period or at intervals or the option of the company and for payment of interest at a fixed rate payable usually either half-yearly or yearly on fixed dates.
What is debenture and types?
Companies use debentures when they need to borrow the money at a fixed rate of interest for its expansion. Secured and Unsecured, Registered and Bearer, Convertible and Non-Convertible, First and Second are four types of Debentures.
What are debentures and examples?
An entity that issues debentures and has lower credit quality can expect to pay a high interest rate, to compensate investors for the increased risk associated with these instruments. Both corporations and governments make use of debentures. Examples of debentures are Treasury bonds and Treasury bills.
What is called debenture?
A debenture is a marketable security that businesses can issue to obtain long-term financing without needing to put up collateral or dilute their equity. A debenture is a type of long-term business debt not secured by any collateral.
What is debenture and its features?
Debentures are some of the debt instruments which can be used by government, companies, organization for the purpose of issuing the loan. Based on the reputation of the corporates loan is issued on fixed ROI (Rate of Interest).
Is debenture an asset or liability?
As a debt instrument, a debenture is a liability for the issuer, who is essentially borrowing money via issuing these securities. For an investor (bondholder), owning a debenture is an asset.
What are the advantages of debenture?
Advantages and disadvantages of Investing in a DebentureAdvantagesDisadvantagesDebentures are debt instruments issued by the company that promises a fixed interest rate on the due date.The payment of interest and principal becomes a financial burden for the company in case of no profits.6 more rows•Jan 11, 2022
What are debentures vs bonds?
Bonds are debt financial instruments issued by large corporations, financial institutions and government agencies that are backed up by collaterals or physical assets. Debentures are debt financial instruments issued by private companies, but any collaterals or physical assets do not back them up.
What is debenture sentence?
Solution. Debenture means acknowledgment of debt. Debenture is a borrowed capital.
What is the different types of shares?
A share is referred to as a unit of ownership which represents an equal proportion of a company's capital. A share entitles the shareholders to an equal claim on profit and losses of the company. There are majorly two kinds of shares i.e. equity shares and preference shares.
What is a debenture in accounting?
Debentures are instruments of debt, which means that debenture holders become creditors of the company. They are a certificate of debt, with the date of redemption and amount of repayment mentioned on it. This certificate is issued under the company seal and is known as a Debenture Deed.
What is debenture India?
A debenture is an instrument of debt executed by the company acknowledging its obligation to repay the sum at a specified rate and also carrying an interest. It is one of the methods of raising the loan capital of the company.
What is a debenture and how does it work?
A debenture is a form of security that a Company grants to a lender in exchange for funding. The funding can be in any form, and most commonly it r...
What is an example of a debenture?
If a company is looking to acquire a trading premises, as opposed to leasing its premises, it may not necessarily have the funds available to buy s...
Why do companies use debentures?
Companies require funding facilities for a variety of means. Most commonly, they are to ease cash flow through the business, to fund a specific pro...
Can I have a debenture over the assets of my own company?
Yes, you can secure lending you have granted to your own company by way of a debenture. However, it is important to consider that if you hold a deb...
How do I apply for finance secured by a debenture?
You can directly approach a bank or equivalent lender and advise them as to what sort of facility you require. They will in turn tell you about the...
What are the advantages of debentures?
Ultimately banks and lenders will only lend relatively limited sums without security. The primary advantage of a debenture is that it allows the co...
What are the disadvantages of debentures?
If the company fails to maintain repayments to its lender, the lender has a number of powers depending on the nature of its security, but usually i...
Are debentures safe?
Debentures do not inherently present any risks, other than in the event of a default. However, it is important to ensure that a debenture is review...
Is a debenture a loan?
A debenture is not a loan, but is a type of security granted in respect of lending. The lending can be in the form of a loan, but it can also take...
Is a debenture an asset?
No, a debenture is not an asset. The asset is the funds lent under the debenture and the debenture itself is merely a document detailing how those...
What is a debenture backed by?
Debentures are backed only by the creditworthiness and reputation of the issuer. Both corporations and governments frequently issue debentures to raise capital or funds. Some debentures can convert to equity shares while others cannot. 1:23.
Why do corporations issue debentures?
Both corporations and governments frequently issue debentures to raise capital or funds.
How Are Debentures Structured?
All debentures follow a standard structuring process and have common features. First, a trust inden ture is drafted, which is an agreement between the issuing entity and the entity that manages the interests of the bondholders. Next, the coupon rate is decided, which is the rate of interest that the company will pay the debenture holder or investor. This rate can be either fixed or floating and depends on the company's credit rating or the bond's credit rating. Debentures may also be either convertible or non-convertible into common stock.
What is convertible debenture?
Convertible debentures are bonds that can convert into equity shares of the issuing corporation after a specific period. Convertible debentures are hybrid financial products with the benefits of both debt and equity. Companies use debentures as fixed-rate loans and pay fixed interest payments. However, the holders of the debenture have the option of holding the loan until maturity and receive the interest payments or convert the loan into equity shares.
Why are convertible debentures attractive?
Convertible debentures are attractive to investors that want to convert to equity if they believe the company's stock will rise in the long term. However, the ability to convert to equity comes at a price since convertible debentures pay a lower interest rate compared to other fixed-rate investments.
How long do government bonds last?
Governments typically issue long-term bonds—those with maturities of longer than 10 years. Considered low-risk investments, these government bonds have the backing of the government issuer.
What is an indenture?
An indenture is a legal and binding contract between bond issuers and bondholders. The contract specifies features of a debt offering, such as the maturity date, the timing of interest or coupon payments, the method of interest calculation, and other features. Corporations and governments can issue debentures.
Why do companies issue debentures?
When investors loan funds to a business, the company may issue a debenture so that repayment of the debt is guaranteed by the overall capital value of the company under certain specific terms . A debenture generally is considered more secure than shares of stock or general bonds.
Is a debenture bond more secure than a stock?
A debenture generally is considered more secure than shares of stock or general bonds. A denture is a bond backed by the general credit of the issuer rather than any specific collateral. The issuer is required to pay a fixed sum annually until maturity and then a fixed sum to repay the principal.
What is a debenture and how does it work?
A debenture is a form of security that a Company grants to a lender in exchange for funding. The funding can be in any form, and most commonly it relates to a long-term funding facility, such as a loan granted to a company that is repayable over a period of time.
Why do companies use debentures?
Most commonly, they are to ease cash flow through the business, to fund a specific project or expansion, or to acquire additional equipment required by the company in its trade.
What is an example of a debenture?
If a company is looking to acquire a trading premises, as opposed to leasing its premises, it may not necessarily have the funds available to buy suitable premises outright. Much like a private individual obtaining a mortgage, the company can approach banks and other appropriate lenders to take a loan to acquire the property.
How do I apply for finance secured by a debenture?
You can directly approach a bank or equivalent lender and advise them as to what sort of facility you require. They will in turn tell you about their product offerings, which may well require the security of a debenture.
What are the advantages of debentures?
The primary advantage of a debenture is that it allows the company to seek greater funding level as the lenders’ exposure is secured over the company’s assets.
Are debentures safe?
Debentures do not inherently present any risks, other than in the event of a default. However, it is important to ensure that a debenture is reviewed by solicitor acting for the company before it is agreed, to ensure that there are no unreasonable terms and that the terms of the debenture are fully understood, to avoid future risk.
Is a debenture a loan?
A debenture is not a loan, but is a type of security granted in respect of lending. The lending can be in the form of a loan, but it can also take other forms, such as an overdraft facility or an invoice finance facility.
What is the goal of a debenture?
The goal is to choose a debenture that fits your investment style and goals. Also, keep in mind that corporate and government debentures aren’t identical when making comparisons.
How do debentures work?
How Debentures Work. Debentures are often issued when a corporation or government needs to raise capital for a specific purpose. For example, a city government may need funds to move ahead with road maintenance or construction projects while a corporation may require capital to complete an expansion project.
What is the difference between a debenture and a bond?
While all debentures are bonds, not all bonds are debentures . The biggest difference between the two has to do with how they’re collateralized. If you’re considering investing in debentures, it’s helpful to understand how they work and how they compare to traditional bonds. Sorting through all the debt securities options that are out there can be confusing; a financial advisor can help you find which ones work best for your financial plan.
Why are convertible debentures attractive?
Convertible debentures may be attractive to investors who are interested in eventually owning an equity stake in the company. Debentures can be an attractive option for raising capital when a corporation or government would prefer not to use existing assets as security for traditional bonds.
Do debentures have a higher credit rating?
Credit risk is also something to consider, though again, companies or governments that issue debentures typically have stronger credit ratings. But on the off chance that a government defaults or a company goes under, you could lose money on a debenture investment.
Can a corporation use a debenture?
Governments and corporations can use debentures as a capital-raising tool in lieu of taking out traditional loans. Debenture investors contribute necessary funds with the agreement that the money they’re putting up will be repaid later with interest.
Do you have to assume a debenture is collateral?
Since there’s no collateral, investors must assume that the government or company issued the debenture can and will pay them back when the time comes. In effect, investors are placing their good faith in the debenture issuer. For that reason, debentures may be more commonly associated with companies or government entities that have strong credit profiles.
What is a debenture in business?
Debentures of a Company – Concept, Types, Advantage, Disadvantage. The word Debenture is driven from the Latin word “debere” which means “to owes a debt”. When a company wants to raise funds on a long-term basis, may borrow money by issue debentures. It is a debt instrument issued by the government or companies to issue the loan.
How long can a company issue a debenture?
No company is allowed to issue debentures having a security date of more than 10 years from the date of the issue, however; a company engaged in the infrastructure projects can issue debentures for more than 10 years but not exceeding 30 Years.
What is bearer debenture?
Bearer Debentures. These debenture holders are those debenture holders whose names are not recorded in the register of the company. It means the names and addresses of such debenture holders are not recorded or registered in a register of the company. These debentures are transferable by mere delivery.
What is a registered debenture holder?
Registered debenture holders are those debenture holders whose names are recorded in the register of the company. It means names and addresses of specific holders whose name is registered on the debenture certificates and such holder names are recorded in a register of the company called “Register of Debenture holders.”.
What is a debenture certificate?
A Debenture Certificate includes the term of repayment of the principal sum at a specific date and the terms of payment ...
What is a secured mortgage debenture?
Secured or Mortgage Debentures. These debentures deal with those debentures which are secured on a particular asset of the company called fixed charges and debentures which are secured on all assets of the company in general, called floating charge.
What is the difference between a debenture and a bond?
The main difference between the debenture and bond is concerning the rate of interest.
What is a debenture loan?
Meaning of Debenture. Debenture is used to issue the loan by government and companies. The loan is issued at the fixed interest depending upon the reputation of the companies. When companies need to borrow some money to expand themselves they take the help of debentures.
Why are debentures not owners?
This is because they are not instruments of equity, so debenture holders are not owners of the company, only creditors. The interest payable to these debenture holders is a charge against the profits of the company. So these payments have to be made even in case of a loss.
Why are debentures the preferred instrument?
At times of inflation, debentures are the preferred instrument to raise funds since they have a fixed rate of interest
What is an unsecured debenture?
Unsecured Debentures: These are not secured by any charge against the assets of the company, neither fixed nor floating. Normally such kinds of debentures are not issued by companies in India.
When are debentures redeemable?
There is no fixed date at which they become payable. They are redeemable when the company goes into the liquidation process. Or they can be redeemable after an unspecified long time interval. Fully Convertible Debentures: These shares can be converted to equity shares at the option of the debenture holder.
What are the advantages of debentures?
Advantages of Debentures. One of the biggest advantages of debentures is that the company can get its required funds without diluting equity. Since debentures are a form of debt, the equity of the company remains unchanged. Interest to be paid on debentures is a charge against profit for the company.
What are the different types of debentures?
Let us take a look at some of these types of debentures. Secured Debentures: These are debentures that are secured against an asset/ assets of the company.
How are debentures issued?
Debentures are normally issued in the same way as they issue shares like, through a prospectus accepting applications for debentures, with the money to be charged in installments on application, allotment, and particular dates. There are three ways to issue a debenture.
Why do companies need debentures?
There are various methods adopted by companies to raise funds and capital , but some companies might opt for issuing debentures, especially when there is a need for raising funds for the long term.
What is secured debenture?
(A) Secured Debentures- The instruments of secured debentures are secured with the charge on the company’s fixed assets. This is to protect the debenture holder in the event that the issuer company defaults on either the principal or interest payment, the issuer’s assets can be sold off to satisfy the debenture holders’ obligation as per the due process of law. Section 71 (3) of the Companies Act of 2013 states that a company has the right to issue secured debentures subject to the government of India’s conditions.
What happens to a debenture if it goes into liquidation?
5. Debentures usually have a charge on the assets of the company, which means that if the company goes into liquidation and is not able to repay the amount , the debenture holders can also sell the property of the company through the legal process under the applicable law to recover the money of the debenture holders.
How long does it take to get a debenture certificate?
The allottee is entitled to receive the debenture certificate within six months of the date of allotment. It is provided for in Section 56 (4) of the Companies Act of 2013. According to Section 56 (6) of the Companies Act, 2013, if a company fails to grant the debenture certificate within the time limit, it will be fined a minimum of 25,000 rupees and a maximum of 5,00,000 rupees. A fine of at least 10,000 rupees and up to 10 lakh rupees will be imposed on the officer who is in default.
When is a debenture issued at par?
At par: It is said to have been issued at par when the sum received for it is equal to the nominal value of the debentures. For example, the issue of debentures worth Rs. 300/- for Rs. 300/- is said to have been issued at par.
When are secured debentures issued?
Secured debentures may be issued by a company if certain terms and conditions are met, according to Section 71 (3).
How much notice is required to call a general meeting of debentures?
Most notably, and in contrast to the Companies Act, general meetings of debenture holders, unless otherwise provided for in the Memorandum of Incorporation, must be called by written notice signed by at least 10% of the nominal amount of the debentures for the time being that are outstanding.
Can a company issue a debenture?
A company may create and issue debentures except in instances where its Memorandum of Incorporation provides otherwise. This is a new concept, in contrast to that contained in the Companies Act, which requires a company to create and issue debentures only if it is allowed under its Articles of Association.
Is a debenture secured or unsecured?
Under the Bill, a debenture document need no longer state whether a debenture is “secured” or “unsecured”, as is currently required under the Companies Act. The Bill does, however, prohibit the expression of debenture as “ secured” in a debenture document unless such a debenture meets the set requirements for a “secured” debenture.
