Debentures
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Index
1. Introduction
2. Meaning of Debenture
3. Features of Debenture
4. Types of Debentures
5. Advantages of Debentures
6. Disadvantages of Debentures
7. Differences between Shares and Debentures
8. Debenture vs Bond
9. Legal Provisions
10. Debenture Trust Deed
11. Redemption of Debentures
12. Issue of Debentures
13. Methods of Issue
14. Debenture Holders' Rights
15. Convertible and Non-Convertible Debentures
16. Role in Capital Structure
17. Interest on Debentures
18. Accounting Treatment
19. Debenture Certificates
20. Case Study: Reliance Debentures
21. Debenture in Indian Companies Act
22. Debenture Trustees
23. SEBI Guidelines
24. Summary
25. Bibliography
Introduction
Debentures are one of the key instruments used by companies to raise long-term funds.
They are popular in corporate financing, especially when companies want to avoid diluting
equity. Debentures offer fixed returns and are considered safer investments compared to
shares.
Meaning of Debenture
A debenture is a document that acknowledges a loan taken by a company. It is a type of debt
instrument that is not backed by physical assets or collateral. Debenture holders are
creditors of the company.
Features of Debenture
- Fixed interest rate
- Repayable on maturity
- Can be listed on stock exchanges
- May be secured or unsecured
- Transferable instrument
Types of Debentures
- Secured Debentures
- Unsecured Debentures
- Registered Debentures
- Bearer Debentures
- Convertible Debentures
- Non-convertible Debentures
Advantages of Debentures
- Fixed interest to investors
- Non-dilutive to equity
- Tax-deductible interest
- Flexibility in structuring repayment
Disadvantages of Debentures
- Fixed obligations
- Interest must be paid regardless of profit
- Risk of over-leverage
- Can affect credit rating
Differences between Shares and Debentures
Ownership: Shares represent ownership, debentures do not.
Voting Rights: Shares provide rights, debentures do not.
Return: Shares get dividends, debentures get interest.
Risk: Shares are riskier than debentures.
Debenture vs Bond
Bonds are long-term debt securities issued by governments or large corporates.
Debentures are a type of bond usually issued by companies, often unsecured.
Legal Provisions
According to Companies Act, 2013, companies must follow legal procedures for issuing
debentures, including trustee appointment and redemption reserves.
Debenture Trust Deed
It is a contract between company and trustee specifying interest, maturity, and terms.
Redemption of Debentures
Debentures are repaid on maturity. Companies may create reserves or buy them back.
Issue of Debentures
Issued at par, premium or discount (subject to legal guidelines).
Methods of Issue
- Public issue
- Private placement
- Rights issue
- Institutional allotments
Debenture Holders' Rights
- Receive interest
- Repayment on maturity
- Legal remedy in case of default
- Transferable
Convertible and Non-Convertible Debentures
Convertible can be converted to equity. Non-convertible remain debt.
Role in Capital Structure
Debentures offer non-dilutive financing and help optimize capital structure.
Interest on Debentures
Fixed interest, often paid semi-annually or annually. Charge on profit.
Accounting Treatment
Interest is an expense. Debentures shown as liabilities in the balance sheet.
Debenture Certificates
Proof of ownership detailing name, interest rate, maturity, etc.
Case Study: Reliance Debentures
Reliance has successfully raised capital using non-convertible debentures offering
competitive interest rates.
Debenture in Indian Companies Act
Regulates issuance, redemption, trustee appointment, investor protection.
Debenture Trustees
Ensure debenture holders' interests are protected. Act if company defaults.
SEBI Guidelines
SEBI provides regulatory framework for issue and trading of debentures in India.
Summary
Debentures are secure, fixed-return instruments used by companies for debt financing.
They are important for both investors and corporate financial planning.
Bibliography
- Companies Act, 2013
- SEBI Guidelines
- NCERT Business Studies Class 12
- Corporate Finance – Khan & Jain
- [Link]
- [Link]