Answer:
Definition: According to Section 2(30) of the Companies Act, 2013, “debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.” In simple words, a debenture is a written acknowledgement of a debt issued by a company under its common seal, containing the terms of repayment of the principal and payment of interest.
Features of debentures:
- Acknowledgement of debt: A debenture is an instrument acknowledging the loan taken by the company. Debenture capital is borrowed capital.
- Creditors of the company: Debentureholders are creditors, not owners, of the company.
- Fixed rate of interest: Debentureholders get interest at a fixed rate on fixed dates, whether the company makes a profit or a loss. Interest is a charge on profits.
- Fixed maturity period: Debentures are issued for a fixed period and are redeemed (repaid) on maturity as per the terms of issue, except irredeemable debentures.
- Security: Debentures are generally secured by a fixed or floating charge on the assets of the company. If the company defaults, the trustee can enforce the security.
- No voting rights: Debentureholders have no voting rights in the general meetings of the company and no control over management.
- Priority in repayment: At the time of winding up, debentureholders are repaid before shareholders.
- Debenture trustee: When debentures are issued to the public or to more than 500 persons, a debenture trustee is appointed to protect the interest of debentureholders.
- Transferability: Debentures are freely transferable; listed debentures can be traded on the stock exchange in demat form.
- Credit rating: Debentures issued to the public must be rated by a credit rating agency, which helps investors judge the risk.
- Various types: Debentures may be secured or unsecured, redeemable or irredeemable, convertible or non-convertible, registered or bearer.
