A company might want to raise money and at the same time do not want to share its ownership. In such a situation, the company can issue debenture. A debenture is a long-term security issued by a company at a fixed interest. It is the written acknowledgment of borrowing money with the price to pay back after a certain time. It is a document consisting of terms and conditions like interest rate, maturity rate, maturity value, securities offered etc. concerned with the issued debenture. The person who holds these debentures are called debenture holders. In short, a debenture is a form of loan taken by the company at mentioned terms and conditions with a promise to pay back after a certain period of time.
Features of Debentures
- It is a loan document that proves the loan given to the company
- Interest is paid periodically on debentures at a fixed interest rate
- Interest is payable even in years in which the company bears a loss
- It can be issued at par or premium or discount
- It can be traded in a stock exchange
- Its original sum is paid after maturity or can be converted into shares or other types ofdebentures
Types of Debenture
A debenture is a security purchased by its holder to provide funds to the issuer as a loan. It is an interest-bearing security that has a maturity date and value. The interest on debenture is payable every year in a lumpsum or in multiple times in a year. There are different types of debenture considering its different aspects. Various types of debenture are explained below:
- Secured and Unsecured Debentures:
The debentures which are secured by a charge upon some or all assets of a company are called secured debentures. Such charge can be either fixed charge or floating charge. On the other hand, unsecured debentures are those debentures that are not charged by the assets of the company. Debenture holders of unsecured debentures purchase such debentures based onthe reputation or goodwill of the company.
- Registered and Unregistered Debentures:
Register debentures are those debentures that are registered with the company. The details of debenture and the debenture holders are kept by the company. The debenture holder has to take permission from the company in order to sell these debentures. On the other hand, unregistered debentures are those which are not registered with the company. The bearer of its certificate and easily sell such debentures. No company permission or pre-approval is required to make sales of such debentures.
- Redeemable and Irredeemable Debentures:
Redeemable debentures are those debentures that are issued for a specific time period. This means the time period of the debenture is fixed at the time of its issue. After the expiry of such a fixed period, the maturity value of such debentures is paid to debenture holders. On the other hand, irredeemable debentures are those which do not have any maturity period. Such debentures are redeemed only at the time of company liquidation. There is very little practice of irredeemable debentures in the financial market around the world.
- Convertible and Non-Convertible Debentures:
Convertible debentures are those debentures that can be converted into equity shares after the specified time mentioned while issuing them. The convertibility condition and ratio are defined at the time of issue of such debentures. On the other hand, non-convertible debentures are those debentures that do not have convertibility provisions. Such debentures cannot be converted into shares. This means these are paid in terms of cahs after their maturity.
Difference Between Share and Debenture
| Basis of Difference | Share | Debenture |
| Meaning | It is the smallest unit of company capital issued as dividend payable security | It is an interest payable security issued by a company to take a loan from its holder |
| Fund | It represents owned fund of the company | It is a borrowed fund by the company |
| Status of Holders | Shareholders are the real owner of the company | Debenture holders are the company creditors |
| Risk Content | High-risk content due to the uncertainty of dividend | Risk content is low as there is a certainty of interest |
| Ownership | Shareholders are the real owners of the company | Debenture holders are just stakeholders of the company |
| Voting Right | Shareholders have voting right in company AGM (Annual General Meeting) | Debenture holders neither participate in company AGM nor have the voting right |
| Rate of Return | Rate of dividend is fixed preference share and rate of dividend varies every year for equity shares with respect to a profit of the company | Interest rate is fixed for all types of debentures while issuing it |
| Payment of Return | A dividend is paid only out of the profit which means no dividend payable in loss years | Interest is payable despite the profit/loss situation of the company every year |
| Conversion | Shares cannot be converted into other shares or debentures | Debentures can be converted into other shares or debentures |
| Allowable Deduction | Since the dividend is paid out of profit, it is not deductible while computing the taxable income of the company | Interest on debenture is a kind of expense that is allowable for deduction while computing a company’s taxable income |
| Balance Sheet Treatment | Shares are recorded under “Share Capital” in the Balance sheet | Debentures are treated as “Long Term Borrowing” in the Balance Sheet |
