Definition of Debenture
Debentures (or loan stock) exist as an alternative form of investing in a company that is more secure than investing in shares because interest payments must be made by the company and must be paid before dividends. Dividends, in contrast to debentures, are paid at the company’s discretion. Debenture holders also become preferential creditors if the company which issued the debentures fails. A disadvantage is that debenture holders have no share in the company and therefore have no control over it.
If a company borrows money, it will give its creditor a document confirming the existence and terms of the loan. This document is called a debenture. Under the debenture, the amount borrowed is repayable at a future date.
During the period of the loan, the company has to pay interest to the creditor in the same way people pay interest to banks on their mortgages. In order to improve the chances of recovering the debt from the company if it fails, a creditor may take a charge over some or all of the assets of the company. This means that the creditor has a legal interest in that asset and the company can’t sell it without either paying off the debt or getting the consent of the creditor. This increases the creditor’s chance of being repaid on the insolvency of the company as it has a preferential claim on money from the insolvency.
In finance, a debenture is a long-term debt instrument used by governments and large companies to obtain funds. It is defined as “a debt secured only by the debtors earning power, not by a lien on any specific asset. It is similar to a bond except the securitization conditions are different. A debenture is usually unsecured in the sense that there are no liens or pledges on specific assets. It is, however, secured by all properties not otherwise pledged. In the case of bankruptcy debenture holders are considered general creditors.
The advantage of debentures to the issuer is they leave specific assets burden free, and thereby leave them open for subsequent financing. Debentures are generally freely transferrable by the debenture holder. Debenture holders have no voting rights and the interest given to them is a charge against profit.
In laws Debenture
Debenture is a general term that loosely refers to debt, but can also refer to more specific things such as the debt itself, the document that details the debt, or a type of bond or security issue provided by a company for a debt.
There are two types of debentures used in finance by corporations or companies who wish to raise capital. A debenture is bought by an individual who is repaid at a schedule date and is also entitled to the interest incurred. The first type is an unsecure debenture wherein the person who has bought the debenture is generally considered a creditor. Ergo, if the entity that has sold the debenture has gone into bankruptcy, the entity is not immediately obliged to repay those who have bought the debenture. The second type of debenture is secure in that those who buy debentures are assured of repayment no matter what the outcome is.
An unsecure debenture is usually issued by corporations or government entities that have had little history of defaulting on their repayments. Thus, there are those who prefer to invest in this type of debenture since it is more likely that repayment will be done.
Another classification of debentures involves the type of repayment given. A convertible debenture is given in the form of cash or stock as opposed to nonconvertible debenture, which may be in the form of an asset.
A debenture may also be commonly referred to as an agreement of debt between 2 parties. It is considered a contract between 2 parties that provides information with regards to the parties involved and the terms of the loan.
Why company issue Debenture
Beforeadvancing a loan on the security of debenture issued by a company the banker should ascertain from the companies Momerdum and article of associationwhether they are issued in accountancy with its power. He should also see whether the company has issued any document before the present issue. In case a prior specific charge over the property charged to the banker has been regedtered, his sincerely will be postponed to that of the earlier mortgage. in any interest , the banker should see that document provides that the company shall not create any farther charge to rank before or part passu with the bankers charge When the debenture gives a specific charge over certain assets it should be accompanied by deeds or other document evidencing the title of the company to the property.
Kind of Debenture
Debenture like ordinary bonds, may be unsecured by any mortgage charge on the property of the company. And are known as “naked” debenture, or may be usually are secured or mortgage debenture. They may be “registered” when they are made out in the mane of particular person who is registered by the company as a holder an a transferable in the same way as shares or barer which like share warrants, are made out of bearer and are negotiableinstrument. Debentures may also be “redeemable” that is to say issued on the term that the company is bound to reply the amount of the debenture. Either at fixed date or upon demand, or perpetual or irredeemable debenture in which case no time is fixed in which the company is bound to pay. Although it may pay back at any time it chooses the debenture holders cannot demand payments as long as the company going concern and does not make default in payment of interest. But all debentures whether irredeemable or otherwise, become payable on the company going into liquidation.
In section 117 in the company law prohibit the issue of any debenture carving voting rights at any meeting of the company. The condition on which debentures are issued are indorsed on the back of the bond which gives differentdecedent right to the share holder .Oneof the condition usually is the debenture is one of the series of a certain number, each for a like say. TK 100 and all the debenture of a series are to be paid rate ably so the if there is not enough to go round , There will be abate proportionally. If the words to “pripassu” are not used the debenture will be payable according with the day of issue and if they are issued on the same day they be payable according to their numerical order.
Types of Debentures
3. Mode of Redemption
4. Coupon rate
From the point of view of security
Security Debenture: Security debenture riffed to those debentures where a charge is created on the assets of the company for the purpose of payment in case of default. The charge may be fixed or floating. A fixed chart is rerated on a specific asset where’s a floating charge is on the general assets of the company. The fixed charge is created against thoseassets which are held by a company for use I operation not mean for sale where’s a floating charge involves all assets excluding those assigned to the secured creditors.
Unsecured Debentures: Unsecured debentures have a don not a specific charge on the assets of the company. However a floating charge may be created on these debentures by default. Normallythis kinds of debentures are not issued.
From the point of view of Tenure
Redeemable Debentures: Redeemable debentures are those which are payable on the expiry of the specific period either in lump some or in installment during the lifetime of a company. Debentures can be redeemed either a part or at premium.
Irredeemable Debentures: Irredeemable debentures are also known as Perpetual debentures Because the company does not give any undertaking for the repayment of money borrowed by issuing such debentures The debentures are repayable on the on winding – up of a company or on the expiry of a long period.
From the point of view of Convertibility
Convertibility Debentures:Debentures, which are convertible into the equity shares or in nay other securities either at the opinion of the company or the debenture holders, are called convertible debentures. These debentures are either fully convertible or partially convertible.
Non-convertibleDebentures:The debenture which cannot be converted onto shares or any other securities are called nonconvertible debentures. Most debentures issued by companies fell in this category.
From coupon rate point of view
Specific Coupon rate debentures: These debentures are issued with a specific rate of interest which is called the coupon rate. The specific rate may be fixed or floating. The floating interest rate is usually tagged with bank rate.
Zero coupon rate Debentures: These debentures are issued with a specific rate of interest. In order to compensate those investors, such debentures are issued at substantial discount and the difference between the nominal value and the issue price is treated as the amount of interest related to the duration of the debenture.
From the view point of registration
Registereddebentures: Registered debentures are those debentures in respect of which all details including names, addresses and particulars of holding of the debenture holders are entered in a register kept by the company. Only executing a regular transfer deed can transfer such debentured.
Bearer Debentures:Beearer debnturesare those debentures in respect of which can be transferred by the way of deliveryand the company does not keep any record of the debenture holders. Interest on debentures is a paid to a person who produces the interests coupon attached to such debentures.
Advantages and Disadvantages of Debenture
1. Control of company is not surrendered to debenture holders because they do not have any voting rights.
2. Trading on equity is possible as debenture holders get a lower rate of return than the earnings of the company.
3. Interest on debenture is an allowable expenditure under income tax act, hence incidence of tax on the company is decreased.
4. Debenture can be redeemed when company has surplus funds.
1. Cost of raising capital through debentures is high of high stamps duty.
2. Common people cannot buy debenture as they are of high denominations.
3. They are not meant for companies earning greater than the rate of interest, which they are paying on the debentures.
Debenture in law’s of Bangladesh 
When any duly stamped debenture is renewed by the
issue of a new debenture in the same terms, the Collector shall,
upon application made within one month, repay to the person
issuing such debenture, the value of the stamp on the original or
on the new debenture, whichever shall be less:
Provided that the original debenture is produced before the
Collector and cancelled by him in such manner as the
Government may direct.
Explanation?A debenture shall be deemed to be renewed
in the same terms within the meaning of this section
notwithstanding the following changes:?
(a) the issue of two or more debentures in place of one
original debenture, the total amount secured being the
(b) the issue of one debenture in place of two or more
original debenture, the total amount secured being the
(c) the substitution of the name of the holder at the time of
renewal for the name of the original holder; and
(d) the alteration of the rate of interest or the dates of
Debentures Laws in Company Act in BD
The laws relate to shares and debentures traded in the stock exchanges. There are two stock exchanges in the country, in Dhaka and Chittagong. The Securities and Exchange Commission created under the Securities and Exchange Commission Act of 1993 is entrusted with the task of ensuring proper issuance of shares and debentures to protect the interests of investors in securities and to promote the development of, and to regulate, the capital and securities market. The history of securities laws in Bangladesh, as in other countries, follows the development of this branch of law in the United States of America.
After the great Wall Street crash of 1929 the Democrats promised sweeping changes in the laws relating to share markets and dealings, and two laws were passed in the USA in 1933 and 1934 creating the U.S Securities and exchange Commission which has earned since then a good reputation as a protector of the American economy. In Pakistan the Securities and Exchange Ordinance provided for banning of fraudulent activities in share trading, but the law was not applied seriously until 1996.
So finally we can say that A debenture is a debt instrument evidencing the holder’s right to receive interest and principal installments from the named obligor. The term applies to all forms of unsecured, long-term debt evidenced by a certificate of debt. When investors loan funds to a business, the company may issue a debenture so that repayment of the debt is guaranteed by the overall capital value of the company under certain specific terms.
1 A manual of mercantile law by MC Shukla.
2 “Company Law and its Implementation” by Robert Doglas
 Book name “Securities of Bank advantage”
 “A manual of Merchatile Law” written by MC Shukla 9347 MiM 8cp2)