DEBENTURESIn corporate finance, the term is used for amedium- to long-term debt instrument usedby large companies to borrow money.A debenture is thus like a certificate of loan ora loan bond evidencing the fact that thecompany is liable to pay a specified amountwith interest and although the money raisedby the debentures becomes a part of thecompanys capital structure.
DEBENTURES VS SHARES CHARACTERISTICS DEBENTURES SHARESCapital/Loan Part of loan of the co. Part of capital of the co.Presentation On Liabilities side under On Liabilities side under Secured Loan. Share Capital.Creditor/Owner Holders are the creditors. Holders are the owners.Participation in Debentureholders do not Shareholders participate inManagement participate in the management the management of the of the company because they company and control the do not have any threat to the total affairs of the company existing control of the company.Voting Right Do not have voting right. Have voting right.Interest/Dividend Interest is paid at pre- Dividend on equity shares is determined fixed rate whether paid at variable rate affected there is any profit or not by the profits of the company.
DEBENTURES VS SHARES CHARACTERISTICS DEBENTURES SHARESExpense/Appropriation Debenture Interest is charges Dividend is appropriation of against the profit and the profit and not deductible deductible as expense to to determine taxable profit determine taxable profit of of the company. the company.Repayment At maturity holders get back Equity shareholders can not their money as per the terms get back their money before & conditions of redemption. the liquidation of the company.Convertibility Can be converted into shares Can not be converted into or other debentures as per debentures. terms of issue.Forfeiture Can not be forfeited for non- Can t be forfeited for non- payment of call(s) money. payment of allotment and/or call(s) money.
DEBENTURES VS SHARES CHARACTERISTICS DEBENTURES SHARESPriority For Payment At the time of liquidation Shareholders are paid at last debentureholders are paid- after paying off before the shareholders. debentureholders, creditors etc.Surplus At Liquidation Surplus is not paid to After paid all the liabilities if debentureholders. there is any surplus, is paid to shareholders.
CLASSIFICATION OF DEBEBTURESFrom security point of viewOn the basis of redemptionOn the basis of NegotiabilityOn the basis of convertibilityOn the basis of priorityFrom coupon or interest rate point of view
TYPES OF DEBEBTURES From security point of view Secured or Mortgage debentures Unsecured debentures On the basis of redemption Redeemable debentures Non-redeemable debentures On the basis of Negotiability Registered debentures Bearer debentures On the basis of convertibility Convertible debentures Non-convertible debentures On the basis of priority First debentures Second debentures From coupon or interest rate point of view Coupon rate point Zero coupon Rate
TYPES OF DEBEBTURESFrom security point of view Secured or Mortgage debentures secured by a charge on the assets of the company. debenture holders have the right to recover their principal amount with the unpaid amount of interest on such debentures out of the assets mortgaged by the company. Unsecured debentures such debentures do not carry any security with regard to the principal amount or unpaid interest.
TYPES OF DEBEBTURES On the basis of redemption Redeemable debentures debentures are issued for a fixed period. principal amount of such debentures is paid off to the debenture holders on the expiry of such period. such debentures can be redeemed by annual drawings or by purchasing from the open market. Non-redeemable debentures debentures which are not redeemed in the life time of the company. such debentures are paid back only when the company goes into liquidation.
TYPES OF DEBEBTURESOn the basis of Negotiability Registered debentures debentures that are registered with the company. amount of such debentures is payable only to those debenture holders whose name appears in the register of the company. Bearer debentures debentures which are not recorded in a register of the company. such debentures are transferrable merely by delivery. holder of these debentures is entitled to get the interest.
TYPES OF DEBEBTURESOn the basis of convertibility Convertible debentures debentures that can be converted into shares of the company on the expiry of pre-decided period. the term and conditions of conversion are generally announced at the time of issue of debentures. Non-convertible debentures debentures that can not be converted into shares of the company.
TYPES OF DEBEBTURESOn the basis of priority First debentures debentures are redeemed before other debentures. Second debentures debentures are redeemed after the redemption of first debentures.
TYPES OF DEBEBTURESFrom coupon rate or interest rate point of view Coupon rate point Usually debentures are issued with a coupon rate, that is annual interest rate on the face value of debentures. This rate may be fixed or floating with the market interest rate. Zero coupon rate Such debentures does not carry coupon rate or specified interest rate with itself. These debentures are issued with substantial discount to compensate the investor for interest.
DEBENTURES AS COLLATERAL SECURITY Collateral security security given in addition to the principal security. It is a subsidiary or secondary security. Issue of Debentures as Collateral security Whenever a company takes loan from bank or any financial institution it may issue its debentures as collateral security. such debentures are issued completely on temporary basis and the bankers refund the debentures whenever the loan is repaid. When company pays the loan amount this right does not arise and debentures will be returned back to the company. However if the loan is not repaid and the principal security is exhausted then the banker will have a right over such debentures and such issue becomes permanent. No interest is paid on the debentures issued as collateral security because company pays interest on loan.
ACCOUNING TREATMENT OFDEBENTURES AS COLLATERAL SECURITYAlternative-1 No journal entry to be made in the books of accounts of the company: Entry is passed only for taking a loan. Bank A/C Dr. To Bank Loan A/C A note of this fact is given on the liability side of the balance sheet under the heading Secured Loans and Advances.
ACCOUNING TREATMENT OFDEBENTURES AS COLLATERAL SECURITY Balance Sheet ...... Co. Ltd. Capital & liabilities Amount Assets Amount (Rs.) (Rs.) Current Assets Bank 50,00,000Secured Loan & AdvancesBank Loan 50,00,000(Secured by the issue of ....debentures of Rs .... Eachissued as collateral security
ACCOUNING TREATMENT OF DEBENTURES AS COLLATERAL SECURITY Alternative-2 Journal entry to be made in the books of accounts of the company: A journal entry is made on the issue of debentures as a collateral security with the entry for taking a loan. Debentures suspense A/c is debited because no cash is received for such issue. Bank A/C Dr. (With Loan Amount) To Bank Loan A/C Debentures Suspense A/C Dr. (With Collateral Security) To Debentures A/C (.....Debentures of Rs .... each issued as collateral security to .....)
ACCOUNING TREATMENT OFDEBENTURES AS COLLATERAL SECURITY Balance Sheet ...... Co. Ltd. Capital & liabilities Amount Assets Amount (Rs.) (Rs.)Debentures 30,00,000 Current Assets(.... Debentures Bank 50,00,000of Rs .... per debentureissued as collateral securitySecured Loan & Advances Miscellaneous ExpenditureBank Loan 50,00,000 Debentures Suspense A/C 30,00,000(Secured by the issue of .... (Debentures issued asdebentures of Rs .... Each collateral security for loan asissued as collateral security per contra)
INTEREST ON DEBENTURES A coupon rate is carry with debentures such as 9% Debentures or 12% Debentures. It is the rate of interest per annum. Interest is always paid on the face value of debentures. Companies generally pay interest on its debentures after every six months. The TDS will be deducted on the interest as prescribed rate on the behalf of debenture holders. (ITA 1961) This deducted TDS will be deposited into Govt. treasury. At the end of the accounting year interest is transferred to Profit & Loss Account.
ACCOUNTING TREATMENT OF INTEREST ON DEBENTURES For making Interest Due Interest on Debentures A/C Dr. To Debentureholders A/C For making Payment of Interest and Deduction of (TDS) Debentureholders A/C Dr. To Bank /C To TDS Payable A/C For making Payment TDS TDS Payable A/C Dr. To Bank A/C For Transferring Interest to P&L A/C Profit & Loss A/C Dr. To Interest on Debentures A/C