Question

Explain the features of debentures.

Answer 1

Meaning: Debentures are one of the principal sources of raising borrowed capital to meet long and medium-term financial needs. Over the years debentures have occupied a significant position in the financial structure of the companies. The term debenture has come from the Latin word ‘debere’ which means to ‘owe’. The term debenture has not been defined clearly under the Companies Act. Sec 2(30) of the Companies Act 2013, only states that ‘the word debenture includes debenture stock, bonds and any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not’.

Definition: "An instrument under seal evidencing debt, the essence of it being an admission of indebtedness”.

Features of Debentures Capital are as follows:

1. Promise: A debenture is a written promise by company that it owes a specified sum of money to holder of the debenture.
2. Face Value: The face value of debenture normally carries high denomination. It is Rs 100/- or multiples of Rs100/-
3. Time of Repayment: Debenture is issued with due date stated in the ' Debenture Certificate' a debenture provides for the repayment of principal amount on maturity date.
4. Priority of Repayment: Debentureholders have a priority in repayment of debenture capital over the other claimants of company.
5. Interest: A fixed-rate of interest is agreed upon and is paid periodically in case of debentures. The rate of interest that the company offers depends upon the market conditions and nature of the business.
6. Assurance of repayment: Debenture constitutes a long term debt. They carry an assurance of repayment on the due date.
7. Parties to debenture: There are certain parties to debentures such as
   (a) Company This is the entity (body) that borrows money.
   (b) TrusteeThis is a party through whom the company deals with debenture holders. The company makes an agreement with trustees and debenture holders. It is known as 'Trust Deed'. It contains the obligations of the company, the rights of debenture holders, etc.
   (c) Debenture Holders: These are the parties who provide loans and receive a 'debenture Certificate' as evidence of participation.
8. Authority to issue debentures: According to the Companies Act 2013, Section 179 (3), the Board of Directors has the power to issue debentures.
9. Status of Debentureholder: Debentureholder is a creditor of the company. Since debenture is a loan taken by company, interest is payable on it at fixed rate, at fixed interval until the debenture is redeemed.
10. No Voting Right: According to Section 71 (2) of the Companies Act 2013, no company shall issue any debentures carrying any voting right. Debentureholders have no right to vote at general meeting of the company.
11. Security: Debentures are generally secured by fixed or floating charge on assets of the company. If a company is not in a position to make payment of interest or repayment of capital, the debentureholder can sell off charged property of the company and recover their money.
12. Issuers: Debentures can be issued by both private company and public limited company.
13. Listing: Debentures must be listed with at least one recognised stock exchange.
14. Transferability: Debentures can be easily transferred, through the instrument of transfer.