What is Debenture: Meaning, Features & Types

What is debenture? Debentures refer to long-term debt instruments that are issued by a government or company intending to meet its financial requirements. 

Investors are paid interest in money for being a creditor of the company. These are also known as unsecured long-term borrowings from the public with a long tenure, usually exceeding ten years.

The debentures meaning in Latin word "debere" means to take a loan or borrow money. Debentures determine that the repayment depends solely on the financial strength and creditworthiness of the issuer company.  

Companies may also issue them security. At the time of liquidation, the company must pay the creditors. Firstly, Investors should verify/check their credit ratings before they invest their money in these instruments.

What is Debenture?

Debentures are a type of bond or debt instrument unsecured by collateral. The companies can use debentures for increasing their capital of the company because they have lower interest rates and shorter holding duration. 

These kinds of instruments are more attractive. Therefore, they can be more attractive than other long-term debt instruments. Debentures are also offered to the public issue at large, the same as equity shares.

What are the features of Debenture?

The key feature of debentures are: -

1. Debentures are debt instruments, which means that debenture holders are known as creditors of the company.

2. Debentures have a fixed rate of interest. What is debenture interest; the interest amount is payable either yearly or half-yearly.

3. Debenture holders do not have any voting rights in the company.

4. Debentures are issued at face value. The face value is the base of Rs. 100.

5. Debentures are issued as debt instruments along with a maturity date. The date represents that the repayment for principal and interest should be made.

6. Debentures have a fixed rate interest payment, half-yearly or every year. The debentures rate changes depending on the nature of the businesses, and the current market conditions.

What are the types of Debentures?

A company can issue different types based on the requirements of capital and its objectives. What is debenture and how many types are there?

1. Security

Secured Debentures - Issued against collateral security.

Unsecured Debentures - These represent the goodwill and creditworthiness of a company when they are issued to leverage the same.

2. Convertibility

Convertible Debenture - The holders have the option to convert their debenture assets into equity shares.

Partly Convertible Debentures - The holders have the option to convert the debentures in part into equity shares.

Fully Convertible Debentures - The debentures can be converted into equity shares by the issuer.

Non-Convertible Debentures - These are regular debt instrument that doesn't allow holders to convert debt into equity. Generally, these have a higher interest rate than their regular counterparts.

3. Tenure

What is debenture concerning ‘tenure’?

Redeemable Debentures - The term "redeemable" is used for the date of redemption. It is noted on the certificate.

Unredeemable Debentures - The redemption of these types of debentures is only possible at the time of liquidation of the company.

4. Coupon Rate

Special Coupon-Rate Debentures - These debentures consist of a predetermined coupon price.

Zero Coupon-Rate Debentures - These debentures are free from the rates of coupon.

5. Registration

Registered Debentures - The company maintains a register that records the details about the debenture holder.

Bearer Debentures- The details of the debenture holder are not with the issuing company.

6. Redemption

What is debenture concerning ‘redemption’?

Callable Debentures - The company have the power to the redemption of debentures before their date of redemption.

Puttable Debentures - The debentures holders can request the company(issuer) to settle the loan with a principal of the loan.

Subordinate Debentures- The debenture holders have priority in repayment over other debenture holders at the time of liquidation.

Participating Debentures are very popular with venture capitalists. The interest will be paid in phases. The interest is not payable in the initial phase. The interest payable on debentures is less in the middle phase. The interest paid is high in the final phase.

What is debenture in accounting?

Debentures are medium to a long-term debt instrument that is used by large companies to borrow money. The term debentures are used in place of the promissory note, bond, or loan stock. 

The documents of debentures include the details regarding the repayment amount, rate of interest, and the time when the company has to repay the debenture.

Two types of treatment of debentures in accounts are: -

1. Issue of debentures
2. Terms of issue of debentures

The three methods for issuing the debentures are as follows: -

• Issue of debenture for cash
• Issue of debenture other than cash
• Issue of debenture as collateral security

What is debenture in company law?

According to the Companies Act, of 2013 debentures include debenture stock, bonds, or any other instrument of a company in a form of debt, whether creating a charge on the company assets or not. 

This is an inclusive definition and amounts to the borrowing of monies from the holders of debentures on such terms and conditions subject to which the debentures have been issued. 

Debentures are documents or certificates signed by the officers authorized by a  company acknowledging money guarantee of repayment and lent with interest and creating security on the assets of the company for the due performance of its obligation.

What are the differences between debenture and bond?

What is debenture; the differences between debenture vs. bond are given as follows: -

1. Debentures are issued during the running of a business whereas bonds are generally issued during the inception of a business.

2. Debentures are backed up by the promise made by the issuing company whereas bond is backed up by collateral or security or a physical asset.

3. In the case of debentures, the principal amount is repaid after the revenue comes from the particular project whereas, in the case of a bond, the principal amount is repaid after the maturity period.

4. There is a higher rate of interest in debentures as compared to bonds.

Bring To The Closure...

What is debenture? A debenture is a common form of debt instrument issued by a company to the public to raise its funds for long-term use. We have understood debentures with their features, types, and meaning of debentures in accounting and company law. Essentially it is an asset for the debenture holders and a liability for the issuing company.