debenture: Meaning and Definition of Debentures
Debenture When a company needs long-term debt capital, it issues debenture. Debentures are certificates for the approval of the loan taken by the company. Debenture is a type of agreement between the company and the lender, according to which the company pays the interest on a predetermined date and returns the loan amount. The debentures are issued through the common currency of the company.
As per Section 2(3) of the Companies Act 2013, “debenture includes any deed of the company in evidence of debenture stock, bond debt, whether or not it carries the assets of the company.” According to Judge Chitty, “Debenture is a document which sanctions a loan.”
Types of Debentures
The debentures issued by companies can be classified as follows-
(A) From the point of view of transferability Debentures are of the following two types from the point of view of transfer
(1) Registered Debentures – The debentures which are in the register of the company and whose principal and interest are payable only to the registered holders, are called registered debentures.
(2) Bearer Debentures – By the mere delivery of such debentures, there is a transfer from one party to another, that is, the names of the holders of such debentures are not written in the register of debenture holders.
(B) Debentures are of the following two types from the point of view of security or from the point of view of security
(1) Unsecured or ordinary or naked debentures – The holders of such debentures do not get security in the company, so such debentures are proof that the company is liable for the amount marked on them. At the time of winding up of the company, such debentures are paid in the same manner as ordinary debtors.
(2) Secured or mortgaged debentures- The holders of such debentures have received charge or mortgage on the property of the company. If the company is unable to pay its creditors in full, the holders of such debentures can recover their money from the mortgaged property of the company.
(C) From the point of view of refinement or stability, there are following two types of debenture from the point of view of refinement or stability
(1) Redeemable Debentures – The payment of such debentures can be made on a predetermined date or at any time during the life of the company by issuing a notification to the debenture holders.
(2) Irredeemable Debentures – The payment of such debentures takes place only in the event of winding up of the company.
(D) Debentures are of the following two types from the point of view of rights (1) First Debentures – Such debenture holders have the first right on the assets of the company. The principal and interest on such debentures are paid before other debentures. (2) Second Debentures—The amount of principal and interest to such debenture holders is paid after the first debentures are paid.
(E) In terms of variability
Debentures are of the following two types in terms of variability:
(1) Convertible Debentures – The company gives the right to the holders of such debentures to get their debentures converted into shares according to pre-determined conditions. ,
(2) Non-Convertible Debentures – Such debenture holders do not have the right to convert their debentures into shares or other types of debentures.
Issue of Debentures
Issue of debentures is done in the same way as shares. For issue of debentures, the company publishes a prospectus, through which the company invites the public to purchase its debentures. The company can receive payment of debentures in one go or in installments i.e. on application of debentures, on allotment and balance amount on one or more solicitations.
Like shares, debentures can be issued at par at a premium and at a discount.
The accounts of issue of debentures are same as issue of shares. The only difference is that instead of the share capital account, the debenture account is opened in the entries.
When debentures are issued at face value, accounts are made in respect of them in the same way as in respect of shares. Issue of Debentures at Premium – When debentures are issued at premium, premium account is credited as the company benefits by doing so. The premium amount is mostly written off at the time of allotment.