Issue of Debentures Video Lecture | Principles and Practice of Accounting - CA Foundation

Ans. A debenture is a type of debt instrument issued by a company to raise funds from the public. It is a long-term debt security that acknowledges a loan agreement between the company and the debenture holders. Debentures are typically unsecured, meaning they are not backed by any specific asset of the company. Instead, they rely on the creditworthiness of the company for repayment.

Ans. Debentures and shares are both financial instruments used by companies to raise capital, but they have some key differences. While shares represent ownership in a company, debentures represent debt. Shareholders have ownership rights and can participate in the company's profits through dividends and voting rights, while debenture holders have the right to receive interest and principal repayment as per the terms of the debenture agreement. Additionally, shares carry higher risk and potential returns compared to debentures.

Ans. There are various types of debentures, including: 1. Secured Debentures: These debentures are secured by specific assets of the company, providing an added layer of security to the debenture holders. 2. Unsecured Debentures: Also known as "naked debentures," these debentures are not backed by any specific assets and rely solely on the creditworthiness of the company. 3. Convertible Debentures: Convertible debentures can be converted into shares of the issuing company at a predetermined conversion ratio. This provides an option for debenture holders to become shareholders. 4. Non-convertible Debentures: Non-convertible debentures cannot be converted into shares and remain as debt instruments until maturity.

Ans. Companies repay debentures through periodic interest payments and the repayment of principal at maturity. The interest payments are typically made annually or semi-annually, depending on the terms of the debenture agreement. At maturity, the company repays the principal amount to the debenture holders. The repayment can be made in a lump sum or in installments, as specified in the debenture agreement.

Ans. Investing in debentures offers several advantages, including: 1. Regular Income: Debenture holders receive fixed interest payments at regular intervals, providing a stable income stream. 2. Diversification: Debentures allow investors to diversify their investment portfolio by adding a fixed-income component to it. 3. Lower Risk: Debentures are relatively less risky compared to equity investments, as they are backed by the creditworthiness of the company. 4. Priority in Repayment: In case of liquidation or bankruptcy, debenture holders have a higher priority in repayment compared to shareholders. 5. Flexibility: Debentures come in various forms, such as convertible and non-convertible, allowing investors to choose an option that suits their investment goals and risk appetite.