Short Answer
A debenture is a written document issued by a company under the Companies Act, 2013 to borrow money from the public. It is a type of long-term loan where the company promises to repay the amount with interest.
Debenture holders are creditors of the company, not owners. They receive fixed interest at regular intervals and are repaid the principal amount after a specified period.
Detailed Explanation:
Debenture
Meaning of Debenture
A debenture is a financial instrument used by companies to raise funds by borrowing money. It is a written acknowledgment of debt issued by a company to investors. The company promises to pay a fixed rate of interest and return the principal amount after a certain time.
In simple words, a debenture is like a loan taken by the company from the public. The people who buy debentures are called debenture holders, and they act as creditors of the company.
Debentures are issued under the provisions of the Companies Act, 2013 and must follow legal rules and procedures.
Features of Debenture
One important feature is fixed interest. Debenture holders receive a fixed rate of interest, regardless of the company’s profit or loss.
Another feature is that debenture holders are creditors, not owners. They do not have ownership rights in the company and cannot participate in management.
Debentures have a fixed maturity period. The company must repay the borrowed amount after a specified time.
Some debentures are secured, meaning they are backed by company assets. In case of failure to repay, assets can be used to recover the money.
They are also transferable, which means debenture holders can transfer them to others.
Types of Debentures
There are different types of debentures based on their features.
Secured and Unsecured Debentures
Secured debentures are backed by company assets, while unsecured debentures are not.
Convertible and Non-convertible Debentures
Convertible debentures can be converted into shares after a certain period. Non-convertible debentures cannot be converted into shares.
Registered and Bearer Debentures
Registered debentures are recorded in the company’s register, while bearer debentures are transferable by delivery.
Redeemable and Irredeemable Debentures
Redeemable debentures are repaid after a fixed period, while irredeemable debentures are not repaid during the company’s lifetime.
Importance of Debentures
Debentures are an important source of finance for companies. They help in raising funds without giving ownership rights.
They provide a regular and fixed income to investors in the form of interest.
Debentures are safer compared to shares because debenture holders get priority in repayment over shareholders.
They also help companies expand their business without diluting control.
Difference from Shares
Debenture holders are creditors, while shareholders are owners of the company.
Debentures provide fixed interest, while shares provide dividends which may vary.
Debenture holders do not have voting rights, while shareholders can participate in management decisions.
Conclusion
A debenture under the Companies Act, 2013 is a loan instrument used by companies to raise funds. It provides fixed returns to investors and helps companies grow without losing control. Debentures play an important role in corporate financing.