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Debenture Print

A debenture is a medium to long-term debt instrument used by large companies to borrow money at a fixed rate of interest. It is a certificate that acknowledges a company's debt or creates a debt. Debenture holders are creditors of the company and receive interest payments but have no ownership rights, in contrast to shareholders who have ownership rights but only receive dividend payments if profits are earned. A debenture trustee represents debenture holders' interests and ensures the company meets its repayment obligations according to the debenture agreement.

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82 views

Debenture Print

A debenture is a medium to long-term debt instrument used by large companies to borrow money at a fixed rate of interest. It is a certificate that acknowledges a company's debt or creates a debt. Debenture holders are creditors of the company and receive interest payments but have no ownership rights, in contrast to shareholders who have ownership rights but only receive dividend payments if profits are earned. A debenture trustee represents debenture holders' interests and ensures the company meets its repayment obligations according to the debenture agreement.

Uploaded by

Suman Dhungana
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Debenture

 In corporate finance, a debenture is a medium to long-term debt instrument used by large


companies to borrow money, at a fixed rate of interest.
 The legal term "debenture" originally referred to a document that either creates a debt or
acknowledges it, but in some countries the term is now used interchangeably with bond,
loan stock or note.
 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 and although the money raised
by the debentures becomes a part of the company's capital structure, it does not become
share capital.
 Debenture includes debenture stock, bonds and any other securities of a company whether
constituting a charge on the company's assets or not. ( Indian Company Act)
 Debenture means any bond issued by a company whether putting its assets as a collateral
or not.( Nepalese Company Act, 2063)
 Debenture means a documents which either creates a debt or acknowledge it and any
document which fulfils either of those conditions is a debenture. ( CHITTY)
 Debenture is a system of ensuring necessary investement when company has lack of
additional investment resources within itself.

Nature of debenture

 Debenture is issued to raised a capital ( in the form of loan capital)


 It is one of the form of securites of company
 It is usually in the form of a certificate issued under the seal of the company.
 Issued by the company in the form of a certificate of indebtedness
 Generally, specifying the dates of redemption, repayment of principal and payment of
interest
 It is a contractual relationship between debenture-holder and the company
 It may be issued with charge or without charge
 The debenture holders are not members of the company but they are creditor of company
 Debenture is transferable moveable property
 Debenture-holders have priority right when the company goes into winding-up
 Usually, its value is higher than the loan granted by Bank or financial institutions
 The interest on debenture can be paid out of capital of the company and not necessarily
from the profit of the company.
 Debenture can be converted into equity shares, if provided in AOA, also mentioned in
prospectus as well as contract concluded with debenture trustee.
Debenture holder right on management of company
 Debenture holders have no rights to vote in the company's general meetings of
shareholders, but they may have separate meetings or votes e.g. on changes to the rights
attached to the debentures.
 Appoint their nominee to supervise the activity of BOD

Debenture trustee
 Debenture trustee represents the debenture-holder.
 Debenture trustee make an ageement on behalf of debenture holder with the company.
 The matters relating to the terms, repayment period and interest of a loan borrowed or lent
by a company shall be governed by a deed or contract concluded between the debenture
holder(creditor) and the borrower(company).

Legal provisions regarding Debenture


 Public compay must publish prospectus before the issuance of debenture. ( Company Act,
2063, section 23(1) )
 Private company can not call on public to sell its debenture at public. (section 10 (c)
 Only after obtaining approval for commencement of business and payment of entire issued
capital, company can raise debenture (section 34(1) )
 Company can issue debenture by specifying the reason, plan of action and determining the
budget necessary for that. (section 43 (1))
Shareholder compared with debenture-holder

 Both the shareholder and the debenture holder have invested their money in the company,
both get some return on the investment, although one gets it way of dividend and the
other by way of interest.
 A person having the debentures is called debenture-holder whereas a person holding the
shares is called shareholder.
 Debenture holder is a creditor of the company and cannot take part in the management of
the company while a shareholder is the owner of the company. It is the basic distinction
between a debenture and a share.
 Debenture holders will get interest on debentures and will be paid in all circumstances,
whether there is profit or loss will not affect the payment of interest on debentures.
Shareholder will get a portion of the profits called dividend which is dependent on the
profits of the company. It can be declared by the directors of the company out of profits
only.
 Shares cannot be converted into debentures whereas debentures can be converted into
shares.
 There are no restrictions on issue of debentures at a discount, whereas shares at discount
can be issued only after observing certain legal formalities.
 Convertible debentures which can be converted into shares at the option of debenture
holder can be issued whereas shares convertible into debentures cannot be issued.
 There can be mortgage debentures i.e. assets of the company can be mortgaged in favor of
debenture holders. But there can be no mortgage shares. Assets of the company cannot be
mortgaged in favor of shareholders.
 Unless the debentures are perpetual, the company can pay back the debenture-holders but
the shareholders cannot be paid back as long as the company is going concerned.
 Lastly, in the winding-up, debenture-holders being secured creditors are paid in priority.
Whereas shareholders are paid back only after all the claims have been satisfied.

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