Meaning: - When a company wants to borrow long term finance then issuing debentures is the most convenient method. Because, debentures can be repaid after a long period such as 10 years, 20 years, etc. the term debenture originates from a Latin word ‘debare’ meaning ‘to owe’. In simple term a debenture is an instrument of credit issued by a company to acknowledge its debt/loan to debenture holder upto a certain sum of money under certain terms and conditions. It is in the form of document known as Debenture Certificate.
Definition: - "an instrument under seal evidencing debt, the essence of it being admission of indebtedness”.
Features of Debentures Capital are as follows: -
1. Promise: -Debenture is a written promise by company that it woes specified sum of money to holder of the debenture.
2. Face Value: -The face value of debenture normally carries high denomination. It is Rs 100/- or multiples of Rs100/-
3. Time of Payment: - Debenture is issued with due date stated in the ' Debenture Certificate' a debenture provides for the repayment of principal amount on maturity date.
4. Interest: - A fixed rate of interest is agreed upon and is paid periodically in case of debentures. The rate of interest that company offers depends upon the market conditions and nature of the business.
5. Assurance of repayment: - Debenture constitutes a long term debt. They carry an assurance of repayment on due date.
6. Parties to debenture: - There are certain parties to debentures such as
(a) Company....... This is the entity (body) which borrows money.
(b) Trustee........... This is a party through whom the company deals with debenture holders. The company makes an agreement with trustees and debenture holders. It is known as 'Trust Deed'. It contains the obligations of company, rights of debenture holders, etc.
(A) Debenture Holders: - These are the parties who provide loan and receive 'debenture Certificate' as evidence of participation.
7. Rights of Debenture holder: - Debenture holders have no right to vote at general meeting of the company.
8. Security: - Debenture can be secured with some property of the company.
9. Terms of issue of debentures: -
(a) Debentures can be issued at par, at premium and even at discount.
(b) According to companies Act, company cannot issue debenture carrying voting rights.
(c) According to companies Act, Sec 292 (1) the Board of Directors has the power to issue debentures.
10. Listing: - Debentures must be listed with at least one recognized stock exchange.
