There are different types of debentures, which probably used nowadays for raising finance. But before moving towards the types of debentures, let’s see what is a debenture? The term debenture is derived from the Latin word “debere” which means to money owing.
A company may increase part of its capital by obtaining loans. The short term capital is mostly met by the company from the banks in the form of overdrafts and cash credits. The long terms finance may be raised by issuing of debentures. A debenture thus is long term finance raised by a company through public borrowing.
“Debenture is a security issued or allotted to the investors under the seal of the company, who become creditors of the company. Therefore, a debenture may be defined as a document issued by the company as evidence of its debt”.
It contains a contract for the refund of the principal amount of sum and the interest at a particular date to the debenture holder. The holder of debentures has a professional claim over the assets of a company over preference and ordinary shareholders.
Characteristics of Debentures
The main characteristic of debentures is given below:
1. Owner of the company
The debenture holders are the creditors of the company and as such, they have no claim on the ownership of the company. They are the creditors of the company.
2. Management
The debenture holders are not entitled to interfere in the management and administration of the company as they are not the owners of the company.
3. Right
The right of debenture holders is to receive money at a fixed rate of interest. They are not concerned with the profit or loss of a company.
4. Loan
A debenture is a certificate of indebtedness issued under the seal of the company. It is thus an acknowledgement of debt.
5. Return of capital
The company gives an undertaking to pay back the capital along with interest at a stated time to the debenture holders.
6. Voting
A debenture holder has no right of voting at any meeting of the company.
7. Interest
The company is to pay a fixed rate of interest to the bondholders whether the company makes any profit or suffers a loss.
8. Profit and loss account
Interest on debentures is a charge against profit and loss account.
9. Payment at the time of winding
On winding up the company, the first priority is to pay back the money to the debenture holders.
Types of Debentures
The major types of debentures are as follow:-
- Ordinary Debentures
It is the first type of debentures, which does not hold any security on account. These debentures are standing in a similar point as any other unsecured creditors and having no concern at the time of company winding up.
- Mortgage Debentures
These types of debentures are secured against the credit on the actual property of the company. The holder of debenture has a lawful right to sell the possessions and recover the credit if the company does not refund the borrowed money at a particular period of time.
- Redeemable Debentures
Redeemable debentures are refundable after a particular period of time. On these debentures, actual interest is paid from time to time, but the amount of principal is refunded after a predetermined period. These are issued on a redeemable basis, therefore company mostly refers to borrow amount on redeemable debentures.
- Irredeemable Debentures
These types of debentures are not refundable during the lifetime of the issuing company. These are only to be paid either at the time of any failure to pay on the part of the company or on the winding up of the company.
- Registered Debentures
These types of debentures are issued in the name of a specific person. The name must show on the front side of the bond and also in the company books.
- Bearer Debentures
These do not show specific name of a person on the bond. The holder of said debenture is allowed to receive any interest fee on the payable dates.
- Equipment trust Debentures
These debentures are issued to raise funds for the purchase of new equipment of a business.
- Convertible Debentures
It certain cases, the company allow the debentures holders to convert their debentures for the Shares of the company. If the investor avails of this provision, then he becomes the shareholder of the company.
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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