Debenture

According to the Companies Act 1956 "  Debenture includes debenture stock, bonds and any other securities of company, brother constituting a charge on the assets of the company or not". Debentures are generally issued by the private sector companies as a long term promissory note for raising loan capital. The company from sister to pay interest and principal as stipulated. Bond is an alternative form of debenture in India. Public sector companies and Financial institutions issue bonds.

Characteristic features of debentures 

The main characteristics feature of debentures are listed below:

1. Form: it is given in the form of certificate of indebtedness by the company specifying the debt of redemption and interest rate.

2. Interest: the rate of interest is fixed at the time of issue pixel which is known as contractual or coupon rate of interest. Interest is paid as a percentage of the par value of the debenture and may be paid anually, semi-annually or quarterly. The company has the legal binding to pay the interest rate.

3. Redemption: As stated earlier the redemption date would be specified in the issue itself.  The maturity period may range from 5 years to 10 years in India. They may be redeemed in installments. Redemption is done through a creation of sinking fund by the company. A trustee incharge of the fund buys debentures either from the market or owners. Creation of the sinking find eliminates the risk of facing financial difficulty at the time of redemption because redemption requires huge sum.

Buyback provisions help the company to reading 2 debentures at a special price before maturity date. Usually the special prices higher than the par value of the debenture.

4. Indenture: Indenture is a trust deed between the company issuing debenture and the debenture trustee who represents the debenture holders. The trustee takes responsibility of protecting the interest of DE debenture holders and ensures that the company fulfills the contractual obligations. Financial institutions, banks, insurance companies law firm attorneys act as trustees to the investors. In the indenture the terms of the agreement, description of debentures, rights of the debenture holders, rights of the issuing company and the responsibilities of the company are specified clearly.

Types of debentures

Debentures are classified on the basis of the security and convertibility:

1. Secured or unsecured

2. Fully convertible debenture

3. Partly convertible debenture

4. Non convertible debenture

Secured or unsecured debentures: a secured debenture is secured by a lien of the companies specific assets. In the case of default the trustee can take hold of the specific asset on behalf of the debenture holders. In the Indian market secured debentures have a charge on the present and future immovable assets of the company.

When the debentures are not protected by any security they are known as unsecured or naked debentures. In the American capital market debenture means unsecured bonds while bonds could be secured or unsecured. Unsecured debentures find it difficult to attract investors because of the risk involved in them. Generally the benches are treated by the credit rating agencies.

Fully convertible debenture: this type of debenture is converted into equity shares of the company on the expiry of specific period. The conversion is carried out according to the guidelines issued by SEBI. The FCD carries lower interest rate than other types of debentures because of the attractive feature of convertibility into equity shares.

Partly convertible debenture: This debenture consists of two parts namely convertible and non-convertible. The convertible portion can be converted into shares after a specific period. Here, the investor has the advantage of convertible and non convertible debentures blended into one debenture. Ex. Procter and Gamble had issued PCD of of ₹200 each to its existing shareholders. The investor can get a share for ₹65 with the face value of ₹10 after 18 months from allotment.

Non convertible debenture: Non-convertible debentures do not confirmed any option on the holder to convert the debentures into equity shares and dividend at the expiry of the specified period.