Debentures


Introduction to Concept of Debentures


A Debenture is basically some of the loan amount the company was interested to raise from the public, A person who has bought a debenture and holding it is called a debenture holder. A debenture holder is the creditor of the company. Debenture is an acknowledgment of the funds received by the company equal to the nominal value of the debenture. It includes the payment of interest at a fixed rate till the times the principal sum becomes repayable. There may or may not be a charge put on the sets of the company as security. The date of redemption along with the rate and mode of payment of interest are mentioned in it. The last few years has seen the capital market of India to evolve at a much faster rate, the reasons are launch of new instruments and the modifications in the old technology. In the present situation debentures prove to be a great contributor to support the financial needs of the corporate sector.


Characteristics of Debentures
  1. Debenture is a movable property. It is in the form of a certificate of indebtedness of the company and issued by the company itself. It generally creates a charge on the undertaking or undertakings of the company. There is usually a specific date of redemption.
  2. The debenture holders are creditors to the company and they do not have any claim of ownership of the company unlike share holders. The company is only under debt of the debenture holders.
  3. As the debenture holders are not the owner of the company so they are not entitled with the administration and management of the company.
  4. The debenture holder need not be concerned with the profits or loss of the company, they have a fixed rate of interest on the principal amount which they get every year irrespective of the financial condition of the company.
  5. Debentures usually have a charge on the assets of the company, which means that if the company on liquidation is not able to repay the amount the debenture holders can sell of property of the company to recover money.
  6. There is an undertaking given by the company to repay debenture holders the principal amount along with the interest at the state time.
  7. When the company is winding up, the first priority of the company is to repay to the debenture holders of the company hence, there is no risk involved of loss of money of the debenture holders.
  8. There is a series with pari passu clause which is usually a part of the debentures being issued and it would be equal as security and if the security is being enforced, the amount shall be discharged relate ably. If there is deficiency of assets, the division will be proportionately.

Kinds of Debenture

Debentures are generally classified into different categories. They are:

Convertibility of Debenture

1. On the basis of convertibility, Debentures are classified into following categories:

(A) Non Convertible Debentures - This type of debentures cannot be converted either into preference shares or equity shares. Non-convertible debentures can either be unsecured or secured. These type of debentures are usually redeemed only on the maturity of a predetermined period which may be 10 or 20 years. These instruments retain the debt character and cannot be converted into shares.

(B) Partly Convertible Debentures - Apart of these instruments are converted into equity shares in future at the notice of issuer. The issuer decides the ratio for conversion. The ratio is usually decided at the time of subscribing the debentures. If a debenture converts some of his debentures into share, he a member as other shareholders for those shares, amending the rights accordingly. Thus convertible debentures may be called as debentures which can be converted by he debenture holder after a specific time.

(C) Optionally Convertible Debentures - It is a t the option of the debenture holder to convert these debentures into share. The price for such conversion is decided by the issuer and was consented upon by both parties at the time of issue of debenture.

2. On the basis of security, Debentures are classified into following categories:

(A) Secured Debentures - The instruments which are secured as there is a charge on the fixed assets of the company. This is to secure the debenture holder as and when the issuer makes a default in the payment of either the principal or interest amount, the assets of the issuer can be sold off in order to do away with the liability to the debenture holders by repayment. In Companies Act, 2013 there is a provision in Section 71(3) which says that a company has right to issue secured debenture subjected to the conditions of the government of India.

(B) Unsecured Debentures - These type of debentures are unsecured in the way that if there is a default in payment of the principal amount or interest amount the debenture holder will have be along with other unsecured lenders and hence could not sell any property or anything for repayment hence they are also called naked debentures.


Rules and Guidelines on Debentures

SEBI (ICDR) Regulations 2009[2]
Under the SEBI Regulation 2009, "specified securities" means equity shares and convertible securities. The "convertible securities" is defined as a security which is exchangeable with or converted in equity shares of the company after date of maturity with or without the option of the debenture holder and it also includes convertible preference share or convertible debt instrument. Thus the conditions to be discussed below are specified for equity shares but are also applicable to public issue of convertible debt instruments also. The issuer of such convertible debt instruments shall comply with the following:


  1. Those assets are substantial to discharge the total principal amount at any point of time
  2. Those assets shall be free from any interference.
  3. The assets or security should come after subtraction of liabilities constituting prior charge, in case the convertible debt instruments are secured by a second or subsequent charge.
  4. The redemption of the convertible debt instruments shall be done by the issuer as per the terms and conditions of the offer document. These regulations are also for partly convertible debt instruments.

Issue of Debentures

The manner of issuing of debentures is usually similar to that of issuing share; it is through prospectus inviting applications for debentures, the money is to be paid in installments on application, allotment and on specific dates. Debentures can, be issued in three ways.

At par: When the amount collected for it is equal to the nominal value of debentures, it is said to have been issued at par. e.g. the issue of debentures of Rs. 300/- for Rs. 300/-

At Discount: When the amount collected is less than the nominal value, debenture is said to have been issued at discount. For e.g., issue of debentures of Rs. 300/- for Rs. 270/-. The difference of Rs. 30/- is the discount and is called discount on issue of Debentures. This discount on issue of debentures is a capital loss.

At Premium: A debentures is said to be issued at a premium, when the price charged is more than its nominal value. e.g., issue of debentures of Rs. 300 each for Rs. 320, the excess amount over the nominal value i.e., Rs. 20 is the premium on issue of debentures. Premium received on issue of debentures is a capital gain. This Premium on issue of debentures could not be used for distribution of dividend. Premium on debentures reflected under Surplus and the head Reserves on the liability side of the Balance Sheet.


Redemption of Debenture

Redemption of debentures stands for repayment of the total amount of the debentures by the company in accordance with the terms and conditions of the issue. Once a debenture is redeemed by the company, it is discharged or absolved of the liability on account of those debentures. There are four ways by which the debentures can be redeemed.
These are:
1) Payment in lump sum– At the end of stipulated time period the company redeems debenture by the payment of lump sum amount as per the terms of issue.

2) Payment in installments –The payment for redemption of debentures in this case is made in installments on specific dates during the tenure of the debenture. The total liability of the company is divided into number of years.

3) Purchase in the open market –Redemption of debentures by purchase in the open market is when a company purchases its own debenture to for the purpose of cancellation of such debentures

4) By conversion into shares or new debentures-In this type the companies redeems its debenture by converting them either into share or creating a new class of debentures. It is at the option of the debenture holder to exercise their right of converting the debentures if he finds the offer beneficial.


Conclusion

A debenture is one of the capital market instruments which are utilized to raise medium or long haul stores from open. A debenture is basically an obligation instrument that recognizes a credit to the organization and is executed under the normal seal of the organization.



What are Debentures?