Introduction - Issue of Debentures Notes | Study Crash Course of Accountancy - Class 12 - Commerce

Commerce: Introduction - Issue of Debentures Notes | Study Crash Course of Accountancy - Class 12 - Commerce

The document Introduction - Issue of Debentures Notes | Study Crash Course of Accountancy - Class 12 - Commerce is a part of the Commerce Course Crash Course of Accountancy - Class 12.
All you need of Commerce at this link: Commerce

Meaning of Debenture:
A debenture issued by a Company is usually in the form of a Certificate, given under the seal of the Company. Thus a debenture is a written acknowledgement of a debt taken by the Company as these are issued under the seal of the Company.
A Debenture Certificate contains the terms of the repayment of the principal sum at a specified date and the terms of payment of interest at a fixed per cent.
Characteristics or features of debentures:
1. A debenture is issued by a Company in the form of a Certificate, which is a written acknowledgement of debt taken by the Company.
2. A debenture is issued under the seal of the company.
3. It contains a contract for the repayment of principal sum at a specified date.

4. As per Companies Act, 2013 no Company is allowed to issue debentures having a maturity date of more than 10 years from the date of issue.
5. Usually the debentures are issued with a specified rate of interest, which is called ‘Coupon Rate’.
6. A debenture is generally secured by a charge on the assets of the Company.
7. Funds raised by the issue of debentures are of long term nature and usually the debentures are repaid after a long period, such as seven years, ten years or twelve years. As such, the loan raised by the issue of debentures is also called as ‘Loan Capital’.

Bond:
It is very much similar to that of debenture. Traditionally, bonds had been issued by the government, but now a days these are also being issued by various semi-government and non-government organisations.
Distinction between debenture and bond:
- Debentures are issued with a fixed rate of interest.
- Bonds can be issued without predetermined rate of interest.
Deep discount bonds or zero coupon bonds:
A deep discount bond or zero coupon bond is one which is issued without prefixed rate of interest and its issue price is heavily discounted.
The difference between issue price and the redemption price represents the total interest to be spread over the duration of the bond.

Types or Kinds of Debentures:
1. Secured or Mortgage Debentures: These debentures are those which are secured either on particular assets of the Company called fixed charge or on all assets of the Company in general, called a floating charge.
2. Unsecured or Naked Debentures: These debentures are those which are not given any security. The holders of such debentures are treated as unsecured creditors at the time of liquidation of the Company.
3. Registered Debentures: Names and addresses of the holders of such debentures are recorded in a register of the Company called, “Register of Debentureholders”. Such debentures are not freely transferable.
4. Bearer Debentures: Names and addresses of the holders of such debentures are not recorded in the Company and these debentures are transferable by mere delivery.
5. Redeemable Debentures: Redeemable debentures are those debentures which will be repaid by the Company either in lump sum at the end of a specified period or by instalments during the lifetime of the Company.

6. Irredeemable or Perpetual Debentures: Irredeemable debentures are those debentures which are not repayable by the Company during its life time. These debentures are repayable only at the time of liquidation of the Company.
7. Convertible Debentures: Convertible debentures are those debentures which are convertible into equity shares.

Distinction Between a Share and a Debenture:

S.No.
Basis of Distinction
Share
Debenture
1.Capital vs Loan
A share is a part of the Capital of the Company, therefore, the shareholders are the owners of the Company.
A debenture is a part of the loan and as such, the debentureholders are the creditors of the Company.
2.Dividend vs Interest
A shareholder gets dividend from the Company.
A debentureholder gets interest from the Company.
3.Fluctuating or Fixed rate of dividend or interest
Dividend is paid only when there are profits. The rate of dividend may fluctuate from year to year depending upon the profits and decision of the directors.
The rate of interest is fixed and it must be paid irrespective of the Company making a profit or incurring a loss.
4.Voluntary or compulsory redemption
It is at the option of the Company to return the amount of shares by buying back its own shares.
The amount of debentures must be returned according to the terms of the issue.
5.Priority of repayment of principal in case of winding up
In the case of winding up, the payment of share capital is made after the repayment of debentures.
In the case of winding up, the payment of debentures is made before the payment of share capital.
6.Unsecured or Secured
A share is always unsecured: Hence, they bear more risk.
Debentures are usually secured on the assets of the Company. Hence, they bear little risk.
7.Restriction on issue at discount
Under Section 53 of the Companies Act 2013, shares cannot be issued at discount.
There are no restrictions on the issue of debentures at discount.
8.Voting rights
Share confers on its holder the right to participate in and vote at Company’s meetings.
A holder of debenture neither possesses any voting right in the Company’s meetings nor can he participate in the meeting.
The document Introduction - Issue of Debentures Notes | Study Crash Course of Accountancy - Class 12 - Commerce is a part of the Commerce Course Crash Course of Accountancy - Class 12.
All you need of Commerce at this link: Commerce

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