Debentures

(Borrowed funds - long term sources of finance)

Definition of a Debenture
“Debenture
is a
certificate

Due to its Issued by a

holder” company

Acknow- Under its

ledging a common
debt seal
Meaning
• Debentures are common securities issued under borrowed fund
capital.
• Debentures are instruments for raising long-term debt capital.
• Debentures are called creditor ship securities because debenture
holder are creditors of a company.
• Holder of debenture certificate is called debenture holder.
Features of Debenture
• Borrowed fund
• Fixed rate of interest and compulsory payment of interest
• Security
• Redeemable/Convertible
• No voting rights and control
• Appointment of trustee
Purpose of Issuing a Debenture
• For setting up a new project.

• Expansion or diversification of Existing project.

• Normal capital expenditure for modernization.
• Merge/Amalgamation of companies.
Types of Debentures

1.On the basis 2.On the basis of

of security redeemability

Secured Unsecured Redeemable Irredeemable

debentures debentures debentures debentures
Types of Debentures

3.On the basis of 4.On the basis of

transferability issue

Registered Bearer Coupon rate Zero coupon

debenture debenture debenture debenture
 5.On the basis
of convertibility

Non-
Convertible
convertible
debentures
debentures

Fully
convertible
debentures

Partly
convertible
debentures
Merits and demerits of debentures

• Advantages to company • Disadvantages to company

• Long term funds • Permanent burden
• Rate of interest payable is • High stamp duty
less
• No dilution of control
Merits and demerits of debentures

• Advantages to investors • Disadvantages to investors

• Fixed and stable source of • No voting rights
income • Not the owners of the
• Safer Investment company
• Definite Maturity Period • Interest is fully taxable