Debenture

1. DEBENTURE
 A Debenture is a unit of loan amount.
 When a company intends to raise the loan amount from
the public it issues debentures. It bears the date of
redemption , rate and mode of payment of interest.
 A person holding debenture or debentures is called a
debenture holder.
 A debenture holder is the creditor of the company.
 A debenture is a document issued under the seal of the
company.

2. TYPES OF DEBENTURES

3. TYPES OF DEBENTURES
From security point of view
(i) Secured or Mortgage debentures :
These are the debentures that are secured by a charge on
the assets of the company. These are also called
mortgage debentures.
(ii) Unsecured debentures :
Debentures which do not carry any security with regard
to the principal amount or unpaid interest are called
unsecured debentures. These are called simple
debentures.

4. On the basis of redemption
(i) Redeemable debentures : These are the debentures
which are issued for a fixed period. The principal
amount of such debentures is paid off to the debenture
holders on the expiry of such period.
(ii) Non-redeemable debentures: These are the
debentures which are not redeemed in the life time of
the company. Such debentures are paid back only
when the company goes into liquidation.

5. On the basis of Records
1. Registered debentures :
These are the debentures that are registered with the
company.
The amount of such debentures is payable only to those
debenture holders whose name appears in the register
of the company.
2. Bearer debentures :
These are the debentures which are not recorded in a
register of the company.
Such debentures are transferrable merely by delivery.

6. On the basis of convertibility
(i) Convertible debentures : These are the debentures
that can be converted into shares of the company on the
expiry of predecided period.
(ii) Non-convertible debentures : The debenture holders
of such debentures cannot convert their debentures into
shares of the company.

7. On the basis of priority
 First debentures : These debentures are redeemed
before other debentures.
 Second debentures : These debentures are redeemed
after the redemption of first debentures.

8. ADVANTAGES/MERITS OF DEBENTURE
ISSUE:
 It enables a company to raise funds for a specific period.
 No dilution of control as debenture holders don’t
possess voting rights.
 Suitable for conservative investors who seek steady
ROI with little or no risk.

9. DISADVANTAGES/DEMERITS OF
DEBENTURE ISSUE
• It is risky if the company fails to pay interest or principal
installment on time, as debenture holders can file
petition for winding up the company.
• There is a limit to which funds can be raised through
debentures.
• It is not suitable for a company with fluctuating earnings
as it may also lead to fluctuations in payment of
dividend payable to equity shareholders.

10. DIFFERENCE BETWEEN SHARES AND
DEBENTURES
SHARES
1. A shareholder is the owner
of the company.
2. Shareholder will get a portion
of the profits called dividend
which is dependent on the
profits of the company. It can
be declared by the directors of
the company out of profits
only.
3. Shares cannot be converted
into debentures.
DEBENTURES
1. Whereas, Debenture holder is a
creditor of the company and
cannot take part in the
management of the company.
2. Debenture holders will get
interest on debentures and will be
paid in all circumstances,
whether there is profit or loss
will not affect the payment of
interest on debentures.
3. Whereas debentures can be
converted into shares.