Debentures

Tuesday, April 18, 2023 1

“DEBENTURES”SUBMITTED TO: • Mrs. Asha Mamraj

MADE BY:

1. RAJ KRISHAN SOLANKI

2. RAJAVI LAKHTAKIA

3. NAUSHEEN IQBAL

AMITY UNIVERSITY RAJASTHAN


DEBENTURES

Debenture is a creditor ship security. It is a document that creates or acknowledge a debt. The debenture holder is entitled to get a fixed rate of interest.The Companies Act Defines debenture as “debenture stock ,bonds and any other securities of a company, whether constituting a charge or not”.

AMITY UNIVERSTIY RAJASTHAN


PURPOSE OF ISSUING DEBENTURES

• For setting up a new project.

• Expansion or diversification of Existing project.

• Normal capital expenditure for modernization.

• Merge/Amalgamation of companies.



FEATURES• Date of Maturity: For all the non convertible and

redeemable debentures, the issuing company has to issue repayment to the debenture holders on the date of maturity. This date is also mentioned on the certificates and it infers the total time for which the money is invested by the lenders which is interval between the date of issue to the date of maturity.

• Charge on Assets and Profits in case of Default: The debenture holders may have claims over the profits and assets of the company in case the company has defaulted in the payment of either the interest or the capital repayment.

• Convertibility: Certain types of debentures are issued with the option of conversion into equity. The ratio of conversion and the time period after which conversion will take place is mentioned in the agreement of debenture. Debentures may be fully or partly convertible in nature.



Debenture holders are not the owners of the company. They are considered the creditors of the corporation or in other words, the company borrow money from them through issuing debenture.• No voting rights: The debenture-holder is not a shareholder

and cannot vote in the company's general meetings.• Fixed rate of interest: A debenture with a fixed charge has a

fixed rate of interest. It can be presented as "10% Debenture". They are always unsecured and earns a fixed rate of interest but has no share of the profit.

• Control: Since, debentures holders are creditors of the company and not its owners, they do not have any control over the management of the company. They do not have any voting rights to elect the directors of the company or on any other matters. But, at the time of the liquidation of the company they have prior claim over share holders and if remain unpaid, they may take control over the company.



TYPES

I. Secured debentures.II. Unsecured debenture.III. Redeemable debentures.IV. Perpetual debentures.V. Convertible debenture.VI. Non-convertible debenture.VII.Coupon rate debenture.VIII.Zero coupon debenture.IX. Registered debenture.X. Bearer debenture



I. SECURED DEBENTURES

• Those debentures which are secured on particular assets called secured debenture. These debenture are also called known as Mortgage debenture



II. UNSECRED DEBENTURES

• Unsecured debentures are those which are not secured fully or partially by a charge on asset. General solvency of the company is the only security for their holders. These are also called naked debenture or simple debenture.



III. REDEEMABLE DEBENTURES

• Debentures which are repayable after a stated period of time are called redeemable debenture. Debentures issued by companies are generally of this type.



IV. IRREDEEMABLE DEBENTURES

• Debentures which are not repayable during the life time of the company are called irredeemable debenture. the company may repay the money at the time of liquidation or on the happening of a contingency or after the expiry of a very long period



V. CONVERTIBLE DEBENTURES Debentures which are convertible in to shares or securities at the option of the holders, after a certain period , are called convertible debentures.

Convertible debentures are two types ;

1.Fully convertible debentures.2.Partly convertible debentures.



VI. NON-CONVERTIBLE DEBENTURES

• Debentures which are not convertible into Shares or other securities of the company are called non-convertible debentures

AMITY UNIVERSITY RAJSATHAN


VII. COUPON RATE DBR.(SPECIFIC RATE)

• Debentures are usually issued with a specified rate of interest .This specified rate is called Coupon rate .It may be either fixed or floating .The floating interest is usually linked with the bank rate and yields on treasury bond plus a reward for risk



VIII.ZERO COUPON DBR.

A zero coupon bond is one which does not carry a specified rate of interest. In order to compensate the investors such bonds are issued at a substantial discount .The difference between the face value and issue price is the total amount of interest related to the duration of the bond.



IX. REGISTERED DEBENTURES

• These are debentures which are payable to the registered holders. The names of the holders of these debentures appear both on the debenture certificate and in the company’s register of debenture holders.



X. BEARER DEBENTURES

• Debentures which are payable to the bearer are called bearer debentures .The names of the debenture holders are not recorded in the register of debenture holders. They are treated as negotiable instruments and as such they are transferable by mere delivery.



XI. TRUSTED DEED A document created by the company regarding the appointment of trustee's in order to protect the interests of debenture holders before they are offered for public subscription

The following are those eligible to be a debenture trustee

• a) A scheduled bank • b) A public financial institution according to sec 4 A (1) of companies act 1956

• c) An insurance company • d) A body corporate



SHARE VS. DEBENTURESSHARE

1. Proprietor of the company

2. Return in the form of dividend.

3. Appropriation of profit4. Always unsecured.5. Right to attend meeting

and vote6. Last claim amount of

capital.7. No charge on the asset

of the company.8. Except redeemable

preference shareholders others will get their money back only at the time of liquidation.

DEBENTURES

1. Creditor of the company.

2. Return in the form of interest.

3. Charge against profit4. Mostly secured.5. No right to attend

meetings & vote.6. First claim amount of

capital.7. Charge is created on

the asset of the company.

8. Debenture holder can get back their money at the time of redemption.



ADVANTAGES OF DEBENTURE ISSUE

1. It enables a company to raise funds for a specific period.

2. No dilution of control as debenture holders don’t possess voting rights

3. Debenture (debt) enables the company to Trade on equity. It can pay dividend to equity shareholders at a rate higher than overall ROI.

4. Debenture holders entitled to a fixed rate of interest. E.g.: 10% debenture

5. They enjoy priority over other unsecured creditors with respect to debt repayment.

6. Suitable for conservative investors who seek steady ROI with little or no risk.

7. Interest on debentures is treated as expense and is tax deductible.

8. Company can adjust its gearing in accordance to its financial plan.



DISADVANTAGES OF DEBENTURE ISSUE1. They have a fixed maturity; hence provision has to be made for

repayment.

2. There is a limit to which funds can be raised through debentures.

3. It is risky if the company fails to pay interest or principal installment on time, as debenture holders can file petition for winding up the company.

4. It is not suitable for a company with fluctuating earnings as it may also lead to fluctuations in payment of dividend payable to equity shareholders.

5. With more risk, you get more return. Debentures being secure investments, returns are less.

6. Like ordinary shares, debenture holders will not be regarded as owners of the company and have no voting rights.

7. Debenture financing enhances the financial risk.

8. Common people cannot buy debenture as they are of high denominations



THANK YOU..!


Education

Debentures