Debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not.
Characteristic or Features of a Debenture
- Debentures are issued by a company and are usually in the form of a certificate, which is an acknowledgment of indebtedness.
- It is issued under the company’s seal.
- It is one of a series issued to several lenders.
- It usually specifies a particular period or date as the date of repayment.
- It generally creates a charge on the undertaking of the company or some parts of its property.
- A debenture- holder, does not have any right to vote in the company meetings.
Types of Debentures
The following are the important types of debentures of the Joint Stock Company.
- Simple Debentures.
- Mortgage Debentures.
- Bearer Debentures.
- Registered Debentures.
- Redeemable Debenture.
- Irredeemable Debentures (Perpetual Debenture).
- Floating Debenture.
- Convertible Debentures.
- Equipment Trust Debentures.
- Income Debentures.
- Legal Debentures.
These are also called Naked Debentures. These kinds of debentures are issued without security.
The holders of these debentures are considered insecure creditors at the time of winding up of the company. So these are not popular these days.
The debentures which are secured on the permanent asset of the company, such as Plant, Machinery, Land, and Buildings, are known as Mortgage Debentures.
These are two kinds of Mortgage Debentures i.e.
- First mortgage debentures.
- Second mortgage debentures.
First Mortgage Debentures holders have the first right to claim on the property of the company.
Second Mortgage Debentures holders have the second right to claim on the assets of the company.
There are payable to bearer; the documents are negotiable instruments and are transferable by simple delivery. Interest is generally payable against the presentation of coupons attached to the debentures.
The names and addresses of registered debentures holders are recorded in the registered of the company. Transfer and transmission of these must be registered in the books of the company, as in the case of shares.
Interest is paid to the registered holders in the same manner as the distribution of dividends.
The amount of these debentures is repayable after a stated period.
Tease is issued subject to the condition that the company shall redeem them on a specified date. These debentures are very common now a day.
Irredeemable Debentures (Perpetual Debenture)
The amount of such loan repayable on the happening of specified contingencies. Generally, no lime is fixed within which the company is bound to redeem them.
Such types of debentures are secured by floating charges on all the assets of the company.
These assets may be bills receivable, stocks, and Book Debts; it creates a charge upon them in favor of debentures holder is against other creditors in case of failure on the part of the company.
These debentures may be converted into preference or ordinary shares of the company.
This option is given to such a debenture holder for the period stated in the conditions of the issue. So this provision protects the investors.
Equipment Trust Debentures
These debentures are issued for specific purposes. Funds are raised by such debentures to purchase certain equipment for the running life of the business.
The holders of these types of debentures are entitled to receive interest at a fixed rate only out of current year profit. If a company gains no profit, no interest ill be payable. So these debentures are not popular nowadays.
Where the title of property of the company may be transferred by deed to money lenders are security for the loan, they are known as legal debentures.
Remedies of Debenture Holders
- He may sue for his principal and interest.
- He may, a petition under Sec. 439 for the winding up of the company by the Court.
But also, he has the following courses open to him:
- Appointment of receiver.
- Proof for the balance.
1. Creation of Charges
A company like any other person can, when it borrows money, give its-creditors security. Often it mortgages or charges its property to its debenture-holders.
2. Fixed and Floating Charges
- Fixed charge: A fixed or specific charge is one that is created on some specific and definite assets of the company, e.g., a charge on land and building.
- Floating charge: A floating charge is an equitable charge which is created on some class of property, which is constantly changing, e.g., a charge on stock-in-trade, trade debtors, etc.
- New financial instruments: Issuer of capital shall make instruments such as Deep Discount Bonds, Debentures with Warrants, Secured Premium Notes, etc. so that an investor can make a reasonable determination of the risks, returns, safety and liquidity of the instruments.