Debenture – Meaning, Definition, Features, and types

Debenture - Meaning, Definition, Features and types-min

The Debenture is treated as the same as a loan. It has a fixed rate of interest which is paid by the firm after every completed year. The debenture has a fixed maturity date. 

Meaning of Debenture:

The Debenture is the type of loan or debt instrument which is issued in the market to subscribe to the public. It is not taken from any individual institution. It is issued like equity or preference shares in the market for purchase and sale to the number of subscribers. Like every type of loan, it also has a fixed rate of interest which will be paid by the company to the subscriber of these debentures. The subscriber of the debenture is known as Debenture holder. 

Definition of Debenture: 

“Debenture includes debentured 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

Features of Debenture:

Type of Loan: 

A debenture is the type of loan because doesn’t have to share the ownership of the business with the debenture holders. They just pay the fixed rate of interest on the balance of debenture at the end of each year. 

Period and Mode of payment predefined:

The Maturity date or the time period after which the Debentures will be repaid decided at the time of the issue of the debentures. All terms regarding repayment of the debenture will be predefined and prefixed. 

Fixed-Rate of Interest:

The rate of interest is fixed throughout the life of the debentures and it is also fixed before the issue of the debentures. 

Interest is charged against Profit:-

The interest on the debentures can be charged against the profit of the year. this is one of the best features of the debentures because the company can claim the amount of interest against its profit. So it can save the amount of taxes. 

It the best feature of the debentures for the debenture holders because the amount due against the debentures paid first. It means the amount due against the debenture will be paid before any settlement of the equity and preference shareholders. 

Types of Debentures:

The types of debentures are can be categories on the basis of:

  • Security 
  • Redemption
  • Convertibility
  • Registration

On the Basis of Security: –

The types of Debentures which are categorized on the basis of Security can be divided into two subcategories. These are shown as below: 

Secured Debentures:

Secured Debentures are those which are secured against the fixed assets. 

Unsecured Debentures:

Unsecured Debentures are those which are not secured against the fixed assets. 

On the Basis of Redemption: –

The types of Debentures which are categorized on the basis of Redemption can be divided into two subcategories. These are shown as below: 

Redeemable Debentures:

Redeemable Debentures are those which are redeemed after the fixed maturity date. 

Irredeemable Debentures:

Irredeemable Debentures are those which are not redeemed after the fixed maturity date.

On the Basis of Convertibility: –

The types of Debentures which are categorized on the basis of Redemption can be divided into two subcategories. These are shown as below: 

Fully Convertible Debentures:

Fully Convertible Debentures are those which are fully converted into equity or preference shares after the maturity date.

Partly Convertible Debentures:

Partly Convertible Debentures are those which are partly converted into equity or preference shares after the maturity date.

Non-Convertible Debentures:

Non-Convertible Debentures are those which are not converted into equity or preference shares after the maturity date.

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References: –

  1. ebook.mca.gov.in
  2. Class +2 Accountancy by Sultan Chand & Sons (P) Ltd.

 

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