BBA VI th sem

Financial institution & Market

Lec 22

Debenture

Debenture is a medium- to long-term debt instrument used by

large companies to borrow money, at a fixed rate of interest. A debenture is thus
like a certificate of loan or a loan bond evidencing the fact that the company is
liable to pay a specified amount with interest. Although the money raised by the
debentures becomes a part of the company's capital structure, it does not
become share capital. Debenture holders have no rights to vote in the company's
general meetings of shareholders, but they may have separate meetings or votes

Types of Debenture

1. Secured and Unsecured:

Secured debenture creates a charge on the

assets of the company, thereby mortgaging the assets of the company.
Unsecured debenture does not carry any charge or security on the assets of the
company.

2. Registered and Bearer:

A registered debenture is recorded in the register

of debenture holders of the company. A regular instrument of transfer is
required for their transfer. In contrast, the debenture which is transferable by
mere delivery is called bearer debenture.

3. Convertible and Non-Convertible:

Convertible debenture can be converted

into equity shares after the expiry of a specified period. On the other hand, a
non-convertible debenture is those which cannot be converted into equity
shares. Since they are not able to convert, they usually carry higher interest rates
than convertible debentures.

4. First and Second:

A debenture which is repaid before the other debenture is

known as the first debenture. The second debenture is that which is paid after
the first debenture has been paid back.

Features of Debentures
 As the return is determined with a fixed rate of income and the
investment is secured with the charge of the company’s assets, this is a
preferred investment option. Fixed return at lower risk is the preferred
investment avenue for all.

 Holding company debentures don’t imply any ownership of the company.

Therefore, debenture holders don’t possess the right to vote or control the
management of the issuing authority.

 With a higher face value, debentures come with a better return than share
investment.

 In the event of liquefying the company, debenture holders get preferences

in terms of repaying the borrowing amount.

 Irrespective of having profit or loss, the concerned company is bound to

return the obligations at a predetermined rate of interest to the debenture
holders.