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What is debenture in simple terms?
In the simplest language, a debenture is a loan taken by a company from the public.
for example, If a person purchases 100, 10% debentures @ ₹ 50 of the Tata. It means the person is giving a loan of ₹ 5,000 to Tata company.
Debentures are issued by the company for a certain period of time with a fixed rate of interest.
The rate of interest is written as a prefix with debentures. For example in the above example, TATA company has issued 10% debentures @ ₹ 50 each for 5 years.
It Implies company would give a 10% fixed rate of interest to debentures holder for 5 years.
After 5 years, the money against debentures would be written back to debenture holders.
When money is returned back to debentures holders, this process is called the redemption of debentures.
The following points are to remember regarding debentures.
- Debenture is a kind of public loan.
- Debentures are issued for a certain period of time. After that debentures are redeemed.
- A fixed rate of interest is paid by the company to the debentures holder yearly, even if company is in the loss.
- Investment in debentures is safe as compared to Shares.
Meaning of Debentures (Class 12)
In addition to raising capital by issue of shares, a company requiring funds on a long-term basis may borrow money by the issue of debentures.
A debenture issued by a company is usually in the form of a Certificate, given under the seal of the company.
A debenture is a written instrument or document issued by the company acknowledging the borrowing.
The terms of repayment of principal and payment of interest at a specified rate are stated in the document.
Definition of Debentures (Class 12)
“Debenture includes debenture stock, bonds and any other instrument of the company evidencing a debt, whether constituting a charge on the assets of the company or not.”– Section 2 (30) of the Companies Act, 2013
A debenture is a document given by a company as evidence of a debt to the holder usually arising out of a loan and most commonly secured by a charge.Topham
“According to section 2(30) of the Companies Act 2013, ‘Debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not’.
Characteristics (Features) of Debentures
A Debenture is issued by the company in the form of a certificate, which is a written acknowledgment of debt taken by the company.
A debenture is issued under the seal of the company.
It contains a contract, for the repayment of the principal sum at a specified date.
As per the Companies Act, 2013 no company is allowed to issue debentures having a maturity date of more than 10 years from the date of issue.
A company engaged in infrastructure projects can issue debentures for more than 10 years but not exceeding 30 years.
The debentures are issued with a specified rate of interest, which is called ‘Coupon Rate’. Payment of interest is made, normally after every six months, whether the company makes a profit or not.
A debenture generally is secured by a charge on the assets of the Company. This means that if the company is unable to repay the debentures as per the terms of the issue, the debenture holders can move the court and realize their money by getting the assets of the company sold.
A fund-raised through debentures by the company is for long period, such as 7 years, 10 years, or 12 years, etc. It is also called ‘Loan Capital’
Examples of Debentures
For example, if a Reliance Company issues 1000, 12% Debentures of ₹ 100 each for 7 years. It implies, Reliance wants to raise 1,00,000 rupees from the public as a loan. 12% of ₹ 1,00,000 i.e., 12,000 per year interest is offered for 7 years. After 7 years, Reliance company would redeem the principal that is ₹ 1,00,000 to the debenture holders.
What are the Types of Debentures (Class 12)
A company may issue the following types of debentures:
- Secured or Mortgaged Debentures
- Redeemable or Irredeemable
- Registered or Bearer Debentures
- convertible or Non-Convertible Debentures
Read Here in Detail:- What are the types of Debentures