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A document which either creates a debt or acknowledges it and any document which fulfills either of these conditions is a debenture” Explain. Debenture means “to borrow”, which is originated from the Latin term debere (to owe debt). The main source of finance of a joint stock company is Share capital. Share capital is raised by issuing shares which allows getting a percentage from the company’s profit. People, who hold or buy the shares of the company, are called the shareholders and they are the owners of the company. Company is liable to them. By issuing share, company basically take money as capital for the company from them and later the company provides them a percentage of its profit. They also share the loss or the liabilities of the company. Those are also distributed in a percentage, among the shareholders. Company may need additional amount of money for a long period. It cannot issue shares every time. So, it can raise loan from the public. The amount of loan can be divided into units of small denominations and the company can sell them to the public. Each unit is called a ‘debenture’. And those people who own those units are called Debenture holder. The amount so raised is loan for the company. A Debenture is a unit of loan amount. A debenture is a document issued under the seal of the company. It is an acknowledgment of the loan received by the company equal to the nominal value of the debenture. It bears the date of redemption and rate and mode of payment of interest. A debenture is therefore, a certificate of loan issued by a company. [1] When a company intends to raise the loan amount from the public it issues debentures. It is a type of security and a debenture holder is the creditor of the company. A Debenture is a document given by a company as proof of a debt to the holder usually arising out of a loan and most commonly secured by a charge.[2] According to Thomas Evelyn, a debenture is a document under company’s seal, which provides for the payment of a principal sums and interest there on at regular intervals, which is usually secured by a fixed or floating charge on the company’s property or undertaking and which acknowledges a loan to the company. As per section 2(12) of Companies Act 1956, “Debenture includes debenture stock, bond and any other securities of the company whether constituting a charge on the company’s assets or not”. [3] [1]A debenture is a certificate issued by the company acknowledging the debt due by it to its holders and is issued by means of a prospectus in the same manner as shares.- Advanced Accounting; chapter:9:23 [2] A charge is created on certain specified assets generally immovable such as land and building, plant and machinery, long term investments and the like. So it is equivalent to mortgage. [3]Other securities means fixed assets which are not moveable and has fixed reselling value. If the company gets bankrupt the bank repay the loan by selling those fixed assets and recompense credits of debenture holders In United Dominion Trust Ltd. v. Kirkwood, receipt or a certificate for a deposit made with a company when the deposit was repayable at a fixed period after it was made, was held to be debenture. In Laxman Bharamji v. Emperor, the Bombay High Court observed that debentures normally indicates the security against the loan taken by the company and contain the conditions of repayment, date, rate of interest payable to the holder. They may even create a charge on the company’s property, but it is not always necessarily so. Briefly speaking, the debentures are the acknowledgement of debt, the promise to return it. [4] In the ordinary business sense a ‘debenture’ is generally understood to be a document acknowledging a debt and securing repayment thereof by mortgage or charge on the company’s property or undertaking , and providing that until repayment ,interest will be paid there on at a fixed rate payable usually half yearly or yearly on fixed dates. Debenture includes stock, bonds and any other company’s securities. It may or may not constitute charge on the assets. A document given by the company which describes the debt and is a proof of debt is known as Debenture. It secures the repayment of loan by creating charge on the assets. It may or may not be under seal. [5] Debentures are tools used by large companies to raise capital for their projects and operations. This is known as a debt offering since the company literally goes into debt to the investors until the price of the debenture is paid back, plus interest, or until it is converted into stock. The company must record this debt in their balance sheet. If bankruptcy occurs, the debenture holders are considered creditors and must be paid back by the companies remaining assets. Debentures are a way for companies to raise capital without having to use their assets or give up ownership in their company. This leaves their assets free to do other things to generate capital for the business. Major types of Debentures:

  • Convertible debentures: these bonds are convertible bonds or bonds that can be converted into equity shares of the issuing company after a predetermined period of time. “Convertibility” is a feature that corporations may add to the bonds they issue to make them more attractive to buyers. In other words, it is a special feature that a corporate bond may carry. As a result of the advantage a buyer gets from the ability to convert; convertible bonds typically have lower interest rates than non-convertible corporate bonds.

[4] Debenture is an acknowledgement of debt under the seal of the company. Since those holding debentures are creditors of the company, debentures are also referred to as creditorships security -Management Accounting; page 521;4

[5] Secured debentures are those which has fixed charge and floting charge. On the other hand Unsecured Debentures are issued without any charge or security

  • Non-convertible debentures: they are simply regular debentures, cannot be converted into equity shares of the liable company. They are debentures without the convertibility feature attached to them. As a result, they usually carry higher interest rates than their convertible counterparts.

§         In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals.[1] §         Thus a bond is like a loan: the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Certificates of deposit (CDs) or commercial paper are considered to be money market instruments and not bonds. Bonds must be repaid at fixed intervals over a period of time. Bonds and stocks are both securities, but the major difference between the two is that (capital) stockholders have an equity stake in the company (i.e., they are owners), whereas bondholders have a creditor stake in the company (i.e., they are lenders). Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely. An exception is a consol bond, which is perpetuity (i.e., bond with no maturity). In the terms of security, there are two types of Debenture. 1. Secured Debenture & 2. Unsecured Debenture Secured Debentures:

  1. Fixed Charge: A fixed charge is created on certain specified assets generally immovable such as land and building, plant and machinery, long term investments and the like. So it is equivalent to mortgage. When the charge is fixed, the company can only deal with the property subject to the charge, that is, a fixed charge allows the company to retain possession of the assets but prevents the company from selling, leasing etc., of the assets without the consent of the charge holders. The property identified remains so identified during the period for which the charge is created.
  1. Floating Charge: A floating charge is generally in respect of movables, that is, properties which are constantly changing. It does not amount to mortgage of property. A charge on the stock-in-trade from time to time of a business is a floating charge. When an item is sold out of the stock, the charge ceases to attach to it and the buyer cannot be asked to pay the debt. When a new item is added to it the charge automatically attaches to it without further new agreement. So the property is certainly identified at the time of creation of charge; its very identification goes on changing and the final identification is at the point of time when the charge crystallizes or becomes fixed after which the company can mortgage or sell that property subject the charge. The charge will continue to attach only so long as the item remains unsold.

Unsecured Debentures: When debentures are issued without any charge or security, they are termed as unsecured or naked debentures. Holders of unsecured debentures are ordinary unsecured creditors and do not enjoy any special rights. The attributes of a debenture: Ø      Issued by the company in the form of a certificate of indebtedness. Ø      It generally specifies the date of redemption, repayment of principal and interest on specified dates. Ø      May or may not create a charge on the assets of the company. Ø      It may be irredeemable, or redeemable on the happening of a contingency. Ø      Section 372 A of the Companies Act also regulates inter-corporate loan and investments and stipulates the ceiling limits on investments and the amount of loan that can be borrowed by a company. The explanation clause of this section states that the loan shall include debentures. Ø       Section 117 to Sections 123 of the Companies Act, 1956 regulate the provisions relating to debentures, appointment of debenture trustees, their duties, creation of Debenture Redemption Reserve Account, liability of trustees etc. Ø       The debentures issued under the Act shall not carry any voting rights.[6] In the case of public issue of debentures, there would be a large number of debenture holders on the register of the company. As such it shall not be feasible to create charge in favor of each of the debenture holder. A common methodology generally adopted is to create Trust Deed conveying the property of the company. A Trust deed is an arrangement enabling the property to be held by a person or persons for the benefit of some other person known as beneficiary. The Trustees declare the Trust in favor of the debenture holders. The Trust Deed may grant the Trustees fixed charge over the freehold and leasehold property while a floating charge may be created over other assets. The Company shall allow inspection of the Trust Deed and also provide copy of the same to any member or debenture holder of the company on payment of such sum as may be prescribed. Failure to provide the same would invite penalties by way of fine under the Act. Any provision contained in the Trust Deed, which exempts a Trustee from liability for breach of Trust, is void. [6] Debenture holders can’t take part in company’s decision making they don’t have any right to give their vote in company’s decision making process. Ø       As per Section 125 (4) of the Companies Act, registration of a charge for purpose of issue of debentures is mandatory. Section 128 stipulates that where a company issues series of debentures which is secured by charge, benefit of which will be available to all debenture holders pari passu, the company shall file the prescribed particulars in Form 10 and 13 with the Registrar of Companies for registration of charge. These forms shall be filed within 30 days after the execution of the deed. Provisions regulating issue of Debentures: Issuing debentures means issue of a certificate by the company under its seal which is an acknowledgment of debt taken by the company. The procedure of issue of debentures by a company is similar to that of the issue of shares. A Prospectus is issued, applications are invited, and letters of allotment are issued. On rejection of applications, application money is refunded. In case of partial allotment, excess application money may be adjusted towards subsequent calls. The power to issue debentures can be exercised on behalf of the company at a meeting of the Board of Directors {Section 292(1) (b) of the Companies Act}. A public company may, however, require the approval of shareholders to borrow money in excess of the aggregate of its paid up capital and free reserves.{Section 293 (1) (d)}. Consent of the shareholders would also be required for selling, leasing or disposing of the whole or substantially the whole of the undertaking of the company under section 293 (1) (a). Debentures have been defined under Section 2 (12) of the Act to include debenture stocks [7], bonds [8] and any other securities of the company whether constituting a charge on the company’s assets or not. 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 only one of the methods of raising the loan capital of the company. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company’s capital structure, it does not become share capital. Finally it can be said that, all the features and classifications of debentures has proved the statement “A document which either creates a debt or acknowledges it and any document which fulfills either of these conditions is a debenture” [6]Bond is similar to that of debenture both in terms of contents and texture. Traditionally government issued the bonds, but now these are also issued by semi-government and non-government organizations. The significant difference between bonds and debentures is with respect to the issue condition i.e., bonds can be issued without predetermined rate of interest. – Company account: Issue of debenture [7]Debenture stock is a document representing the loan capital of the company consolidated into one single composite debt which may be divided into the transferable in convenient units of fixed amount.

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