Question

Answer the following question.

Define Debenture and explain the features of debentures.

Answer 1

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.

Features of Debentures are as follows:

1. Promise :
   Debenture is a written promise by the 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 Rs.100.
3. Time Of repayment :
   Debentures are issued with the due date stated in the ‘Debenture Certificate’. A debenture provides for the repayment of the principal amount on the maturity date.
4. 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.
5. Assurance of repayment :
   Debentures constitute a long term debt. They carry an assurance of repayment on the due date.
6. Parties to debentures:
   There are certain parties to debentures such as-
   a) Company :
   This is the entity that borrows money.
   b) Trustee :
   This 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.
7. Rights Of Rights of Debenture holder:
   Debenture holders have no right to vote at the general meetings of the company.
8. Terms of issue of debentures :
   a) Debentures can be issued at par, at a premium, and even at discount.
   b) According to the Companies Act, a company can not issue debentures carrying voting rights.
   c) According to the Companies Act, Sec 292 (1), the Board of Directors has the power to issue debentures.
9. Security: 
   Debentures can be secured with some property of the company.
10. Listing:
    Debentures must be listed with at least one recognized stock exchange.