Debt Capital and Debt Instruments
Debentures or bonds are debt instruments which pay interest over their life time and are used by companies to raise medium or long term debt capital. If an investor prefers fixed income, he / she may invest in these instruments which may give him / her higher rate of interest than bank fixed deposit.
- In the Indian securities markets, the term ‘bond’ is used for debt instruments issued by the Central and State governments and public sector organizations and the term ‘debenture’ is used for instruments issued by private corporate sector.
The Debt Instruments may be Corporate Debt or Government Debt. Corporate debt instruments are generally called Debentures while Government debt instruments are generally called Bonds, but Bonds can be issued by companies and local governance bodies too.
A debenture is one of the capital market instruments which is used to raise medium or long term funds from public. A debenture is essentially a debt instrument that acknowledges a loan to the company and is executed under the common seal of the company. The debenture document, called Debenture deed contains provisions as to payment, of interest and the repayment of principal amount and giving a charge on the assets of a such a company, which may give security for the payment over the some or all the assets of the company. Issue of Debentures is one of the most common methods of raising the funds available to the company. It is an important source of finance.
Salient Features of Debentures
The most salient features of Debentures are as follows:
- A debenture acknowledges a debt
- It is in the form of certificate issued under the seal of the company (called Debenture Deed). It usually shows the amount & date of repayment of the loan.
- It has a rate of interest & date of interest payment.
- Debentures can be secured against the assets of the company or may be unsecured.
- Debentures are generally freely transferable by the debenture holder. 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.
- The interest paid to them is a charge against profit in the company’s financial statements.
Types of Debentures
The debentures can be divided into various types on the basis of security, performance, priority, convertibility and Records as shown in the below graphics:
What are naked debentures and secured debentures?
- Naked Debentures: These Debentures are not secured against any assets of the Company. In case of winding of the company, debentures holders holding unsecured debentures treated as unsecured creditors.
- Secured Debentures: These Debentures are secured by a charge on the assets of the company. These debentures are secured either on particular assets called fixed charge or on the general assets of the company called floating charge. The debentures holder has a right to recover outstanding loan & interest out of such charge assets. These debentures are issued by the company under an agreement which is called “Mortgage Deed”. Such mortgage is registered with Register of Companies.
What are Redeemable and Irredeemable debentures?
- Redeemable Debentures: The debentures are redeemed by repayment of the amount of debentures after a specified date, as per terms & conditions issued.
- Irredeemable Debentures: In this case the issuing company does not fix any date by which debentures should be redeemed & the debentures holder cannot demand repayment of the sum of debenture from the company so long as it is going concern.