A debenture is a form of borrowing that the company takes from the public when it is in the need of finance for its business. It is a form of a loan with a fixed interest-bearing cost. Debentures are the written instruments that are issued by the company under their common seal against loan received. They are just like a loan certificate. Debentures are issued for a fixed period with the fixed rate of interest that is payable monthly, half-yearly or annually. Like public issues, debentures are also issued to the public at large. A debenture is one of the important sources of finance for large companies. Debentures are defined under Section 2(30) of Companies Act 2013
Applicable laws for governing issue of debentures are:
A company can issue the debentures with an option of conversion into equity shares at the time of redemption but they cannot issue debentures with voting rights.
A company can issue secured debenture by following the provisions & guidelines of these rules.
There are following types of debentures that a company can issue are:
These are the debentures that are issued by securing them against the asset of the company. The charge is created on the assets of the company in case of default in repayment of Companies. The assets will be sold to pay such loan amounts in case the company does not have sufficient funds to repay the debentures. The charge can be:
Such forms of debentures are those that don't create the charge on any assets. These types of debentures are least issued in companies of India.
Debentures are payable at the end of the predetermined term. That is they are payable at the maturity of the specified period in lump sum amount or installments. Redeemable debentures are redeemed at par, premium or discount.
These debentures are perpetual. These are not payable on the expiry of some fixed time rather they are redeemable after a long cified interval or when the company goes on liquidation.
Such debentures have no option of conversion into shares of any kind. These debentures remain debentures till the maturity. These are the most common form of debentures.
Here the debenture holder gets an option of partial conversion of his debentures. With this after conversion, he will be both, the creditor & shareholder of a company.
These debentures are fully convertible into shares. Thus if the debenture holder opts after a specified time all his shares will be converted to equity shares.
Following are the unique features of debentures that make them a suitable form of borrowing:
The issue of debenture is more or less similar to the equity issue. The company starts by releasing a prospectus & declares about the debenture issue. Interested investors then apply for the same. It’s upon the company either they demand full amount or partly by installments.
Once the company invites for application & receives the application from investors those apply for debentures. The company can issue debentures in the following ways:
Debentures are issued for cash in most common practice. It can be issued in three ways:
Debentures are issued at their nominal value. They are issued neither above nor below their face value. Now it depends upon the company that decides to take the full amount of investment in lump sum amount or installments. When debentures are issued at par, long-term borrowings mentioned on liabilities of Balance Sheet are equal to the asset side under the head cash, thus there is no need for further adjustments.
When the debentures are issued at a price higher than the nominal value it is termed as an issue of debentures on premium. Premium amount is credited to the Securities Premium Account and is reflected on the side of "Reserve & Surplus" of Balance Sheet.
When the debentures are issued at a value less than its nominal value, debentures are said to be issued at discount. The discount amount is treated as a capital loss and is charged to "Securities Premium Account". The discount can be later written off.
Debentures are given for consideration other than cash. When the company has purchased certain assets or acquired certain business from vendors and instead of paying them cash, the company issue debentures to such vendors. In this case, also, debentures can be issued at par, premium & discount.
Debentures are issued as collateral security against a bank loan or any borrowings from a bank or financial institution. Collateral securities are the second or parallel securities which are provided along with actual or primary security against the loan taken from the bank. These debentures are Contingent liabilities for a company. This means these liabilities may or may not occur. In the default in repayment of a loan by a company, this liability occurs.
Step by step process for the issue of debentures to be followed by the company is:
Company has to consider the following things while issuing debentures:
Following are the different methods of redemption of debenture:
When the applications received are more than the original number of shares offered for debenture issue. In this case of oversubscription, debentures are not allotted to certain applicant & the money is refunded to an applicant for non-allotment of debenture. Although money is not refunded to the applicant to whom debentures are issued and the money is adjusted against subsequent calls to be made.
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