View Full Version : Q. What do you understands by the term debentures issued by a company?

08-28-2012, 01:18 AM
Q. What do you understands by the term debentures issued by a company? what are its contents and describe at least three of its different kinds. (1998)
Q. Define debentures what are contents of a debenture and what remedies are available to a debenture holder. (2000) (2007/A)
Q. Define debenture stating its various kinds. discuss its usual contents and state the period for which these are issued. (2003)
1. Introduction:
The document which the company issues for the borrowed amount to the lender is called debenture. a company may raise part of its capital by obtaining loans. the long term finance may be raised by issuing of debentures. it contains a contract for repayment of a principal amount and interest at the specified date to the debenture holder it is issued under the seal of this company.
2. Meaning:
The term "debenture" is derived from the Latin word "debar" which means to own a debt.
Concise oxford dictionary:
Debentures means certificate given by a business corporation as a receipt for money lent at a fixed rate of interest until the principal is repaid.
3. Definitions:
1. L. B Curzon:
"Debenture is a document under company's seal acknowledging indebtedness for a capital sum, undertaking to repay on an ascertainable date and pay interest at a fixed rate"
II. Companies ordinance 1984:
A debenture is a document containing an acknowledgement of indebtedness which need not be although it usually is under seal which need not give although is usually does give, a charge and assets of the company, and which may or may not be one of a series.
4. Contents of debentures:
Following are the main contents of debentures.
(i) The body containing the bond and the charge.
(ii) The condition endorsed there on.
5. Features of debentures:
The main features of debenture are following.
(i) It is an instrument indicating the indebtedness of the company.
(ii) It has nominal value like share.
(iii) It is issued under that seal of the company.
(iv) The term of issue, the repayment of the principal are specified on the back of the document.
(v) A fixed rate of interest is paid on debentures.
(vi) The interest on debenture is a charge on the profit and loss account of the company.
(vii) Debentures are covered by security of assets of the company.
6. Period of debentures:
Debentures may be.
(i) For a fixed term of years.
(ii) Payable on demand.
(iii) Perpetual in which case no time is fixed within which the company would be bound to redeem them.
7. Coupons attached to debentures:
Debentures have coupons which are attached to it the interest is payable to the bearer of the coupon which is an order on the bank of the company to pay the certain sum to person who present the debenture.
8. Kinds of debentures:
The main kinds of debenture are as under.
I. Ordinary or naked debentures:
Ordinary or naked debenture are those which do not carry any security in respect of the repayment of interest or the principal.
II. Redeemable debentures:
The debenture which are repayable after a certain period are called redeemable debentures. the interest on such debentures is paid periodically but the principle amount is returned after a fixed period.
III. Mortgage debentures:
A mortgage debenture is one which is secured by a mortgage on the real property of the company. if the company fails to repay the borrowed amount at a specified period, the debenture holder has a right to sell the property and recover the loan.
IV. Irredeemable debenture:
The debentures not repayable during the life time of a company are called irredeemable debentures irredeemable debenture are repable either at the winding up of the company or on any default.
V. Registered debenture:
Registered debenture are those debentures which are issued in the name of owner. the name of the owner is written on the face of the bond as well as on the books of the company.
VI. Bearer debentures:
The debentures payable to bearer are called bear dentures. the debentures do not show the name of the owner. the debentures do not show the name of the owner. the holders of the bearer debenture is entitled to receive interest payment on the due dates.
VII. Convertible debentures:
The debentures convertible into shares are called convertible debenture. the holders of such debentures are allowed to convert their debenture into shares within a specified period.
VII. Convertible debentures:
The debentures convertible into shares are called convertible debenture. the holders of such debentures are allowed to convert their debenture into shares within a specified period.
IX. Income debentures:
The income debentures holders have right to receive interest out of the profit of current years. if company earns no profit no interest is payable.
X. Collateral debentures:
Collateral debentures are those debentures which are issued as an additional security to bank against borrowed money.
9. Remedies of debenture holders:
A debenture holder who wants to realize his security and get his money back may use of all or any of the following remedies.
I. Debenture holder action:
Debenture holder may sue on behalf of himself and all others debentures holders to obtain payment or to enforce his security of sale. the court make appointment of receiver and a manager if necessary for the purpose of running of business of the company declare the debentures to be charge on the assets of the company and directs inquiry as to who are the debenture holders and orders of a sale of the property.
II. Appointment of receiver by debenture holder:
Debenture holder may appoint a receiver if the conditions give him power to do so.
III. Foreclosure:
Debenture holder may apply to the court for foreclosure of the company.
IV. Petition for winding up of the company:
Debenture holder may file a petition for winding up to of the company as a creditor of the company for the amount advanced by him and interest.
V. Sale through trustees:
Debenture holder may sell the property of the company through trustee if such a power is given by the debenture trust deed.
VI. Valuation of giving up security:
If the company be insolvent, he may value his security and if found insufficient, prove for the balance of his debt, or give up his security and prove for the whole debt.
VII. Appointment of receiver:
A receiver may be appointed by the court. on the appointment of a receiver, the assets become specifically charged in favour of the debentures holders and the power of the company to deal with them in the ordinary course of business ceased.
10. Conclusion:
To conclude I can sat that, the debenture is a security issued or allotted to the investors under the seal of the company who becomes creditors of the company. debenture holders are not share holder of the company and they cannot interfere in the acknowledgment of debt and written promise by the company to repay the amount borrowed. the debenture holders are not owner of the company but they are creditors of the company.