Debentures - Types, Features and Accounting - class-XII

Convertible debentures are debt instruments that provide the holder with the option to convert the debt into equity shares of the issuing company after a specified period.

Debenture holders are creditors of the company. They are entitled to interest regardless of whether the company makes a profit or a loss, as interest is a fixed financial obligation.

According to the Companies Act, a company cannot issue debentures with voting rights. Debenture holders are creditors, not owners, and therefore do not have voting power in company affairs.

If debentures are issued at a price more than its nominal value (face value) such an issue is called issue at a premium.

There are two type of debenture which are classified from the point of view of tenure i.e. 1. Redeemable debentures and 2. Irredeemable debentures.

 A debenture is a document that lays down the terms and conditions of a loan, and provides clarity and security to lenders if the borrowing company becomes insolvent. Attaching a floating charge to the debenture offers further benefits, enabling the holder to rank above unsecured creditors when it comes to repayment.

The legal definition of a debenture is broad and includes debenture stock, bonds, and any other securities of a company, regardless of whether they are secured by a charge on assets.

Debentures are debt instruments. The company is obligated to pay interest at a fixed rate until the principal amount is repaid to the debenture holder at the time of maturity.

Non-convertible debentures are those that do not offer the holder the option to convert the debt into equity shares. They remain debt instruments until maturity.

Issue of Debentures as Collateral. Debentures issued as collateral security is secondary or parallel security for the original loan taken by the company. The lender can realize the collateral security in case borrower fails to make the payment of the original loan.

Interest on debentures is a charge against profit, meaning it must be paid regardless of profit or loss and is recorded in the Profit and Loss Account as an expense.

Mortgaged debentures are secured by a charge on the assets of the company. A fixed charge applies to specific assets, while a floating charge applies to current assets.

Naked debentures, also known as unsecured debentures, are those that do not carry any charge or security on the assets of the company.

Bearer debentures are negotiable instruments that can be transferred by simple delivery, meaning the holder at the time is entitled to the interest and principal.

Non-convertible debentures represent borrowed funds for the company. They are a form of debt or loan capital, distinct from owner's equity capital.

Debentures can be classified by security (mortgage/simple), transferability (registered/bearer), redemption (redeemable/irredeemable), and conversion (convertible/non-convertible). All listed categories are valid.

Interest on debentures is a mandatory expense for the company, regardless of profit. Therefore, it is a charge against profit, not an appropriation of profit.

When debentures are issued as collateral security, they are a secondary security. The lender is only entitled to interest on the primary loan amount, not on the collateral debentures.

A debenture is a type of debt instrument unsecured by collateral. Since debentures have no collateral backing, debentures must rely on the creditworthiness and reputation of the issuer for support. 

Debentures can be issued as a collateral security against the loan taken from banks or financial institutions.

Debenture is a written instrument acknowledging a debt under the common seal of the company. There are various types of debentures: Secured and unsecured debentures, redeemable and irredeemable debentures, Convertible and non-convertible debenture, registered and bearer debentures, Specific coupon rate and zero coupon rate debentures etc.