Tamil Nadu Board of Secondary EducationHSC Commerce Class 12

Sources of Borrowed Capital - Debentures



  • Features
  • Promise
  • Face Value
  • Time of Repayment
  • Priority of Repayment
  • Assurance of Repayment
  • Interest
  • Parties to Debentures
  • Authority to issue debentures
  • Status of Debentureholder
  • No Voting Right
  • Security
  • Issuers
  • Listing
  • Transferability
  • Types of Debentures
  • Secured debentures
  • Unsecured debentures
  • Registered Debentures
  • Bearer Debentures
  • Redeemable Debentures
  • Irredeemable Debentures
  • Convertible Debentures
  • Non-convertible Debentures


Debentures are one of the principal sources of raising borrowed capital to meet long and medium-term financial needs. Over the years, debentures have occupied a significant position in the financial structure of the companies.
The term debenture has come from the Latin word ‘debere’, which means to ‘owe’.
The term debenture has not been defined clearly under the Companies Act.
Sec 2(30) of the Companies Act 2013 only states that ‘the word debenture includes debenture stock, bonds and any other instrument of a company evidencing a debt, whether constituting a charge on the company's assets or not’.
Under the existing definition, debenture includes debenture stock. Debenture means a document which either creates or acknowledges debt. Ordinarily, a debenture constitutes a charge on a company's property, but there may be a debenture without any such charge.
Palmer defines: “A debenture as an instrument under seal evidencing debt, the essence of it being an admission of indebtedness.”
Topham defines: “A debenture is a document given by a company as evidence of debt to the holder, usually arising out of the loan, and most commonly secured by the charge.”
According to the above definitions, a debenture is evidence of indebtedness. It is an instrument issued as a debenture certificate under the company's common seal. 


Features of Debentures

  1. Promise: Debenture is a promise by a company that it owes a specified sum of money to the debenture holder.
  2. Face Value: The face value of a debenture normally carries a high denomination. It is ` 100 or in multiples of ` 100.
  3. Time of Repayment: Debentures are issued with the due date stated in the debenture certificate. The principal amount of the debenture is repaid on the maturity date.
  4. Priority of Repayment: Debenture holders have a priority in repayment of debenture capital over the other claimants of the company.
  5. Assurance of Repayment: Debenture constitutes a long-term debt. They carry an assurance of repayment on the due date.
  6. Interest: A fixed interest rate is agreed upon and paid periodically in case of debentures. Payment of interest is a fixed liability of the company. It must be paid by the company irrespective of whether it makes a profit.
  7. Parties to Debentures:
    a) Company: This is the entity which borrows money.
    b) Trustees: A company has to appoint Debenture Trustee if it offers Debentures to more than 500 people. This is a party through whom the company deals with debenture holders. The company makes an agreement with trustees, known as a Trust Deed. It contains the obligations of the company, rights of debenture holders, powers of Trustee, etc.
    c) Debenture holders: These are the parties who provide a loan and receive a ‘Debenture Certificate’ as evidence.
  8. Authority to issue debentures: According to the Companies Act 2013, Section 179 (3), the Board of Directors has the power to issue debentures.
  9. Status of Debenture Holder: The debenture holder is a creditor of the company. Since a debenture is a loan a company takes, interest is payable at a fixed rate at fixed intervals until the debenture is redeemed.
  10. No Voting Right: According to Section 71 (2) of the Companies Act 2013, no company shall issue debentures carrying any voting right. Debenture holders have no right to vote at a general meeting of the company.
  11. Security: Debentures are generally secured by fixed or floating charge on company assets. Suppose a company is not in a position to pay interest or repay capital. In that case, the debenture holder can sell off charged property of the company and recover their money.
  12. Issuers: Debentures can be issued by private and public limited companies.
  13. Listing: Debentures must be listed with at least one recognised stock exchange.
  14. Transferability: Debentures can be easily transferred through the instrument of transfer. 

Types of Debentures

Based on security
1. Secured and
2. Unsecured Debentures.

Based on transfer
3. Registered and
4. Bearer Debentures.

Based on repayment
5. Redeemable and
6. Irredeemable Debenture.

Based on conversion
7. Convertible and
8. Non convertible Debenture.

  1. Secured debentures: The debentures can be secured. The property of the company may be charged as security for the loan. The security may be for some particular asset (fixed charge) or the asset in general (floating charge). The debentures are secured through a ‘Trust Deed’.
  2. Unsecured debentures: These are the debentures that have no security. The issue of unsecured debentures is permitted by the Companies Act 2013.
  3. Registered Debentures: Registered debentures are those on which the names of holders are recorded. A company maintains a ‘Register of Debenture holders’ in which the name, address and particulars of holdings of debenture holders are entered. The transfer of registered debentures requires the execution of a regular transfer deed.
  4. Bearer Debentures: The name of holders are not recorded on the bearer debentures. Their names do not appear on the ‘Register of Debenture holders. Such debentures are transferable by mere delivery. Payment of interest is made using coupons attached to the debenture certificate.
  5. Redeemable Debentures: Debentures are mostly redeemable, i.e. Payable at the end of some fixed period, as mentioned on the debenture certificate. Repayment can be made at a fixed date at the end of a specific period or by instalments during the company's lifetime. The provision of repayment is usually made in a ‘Trust Deed’.
  6. Irredeemable Debentures: These kinds of debentures are not repayable during the company's lifetime. They are repayable only after the liquidation of the company or when there is a breach of any condition or when some contingency arises.
  7. Convertible Debentures: Convertible debentures give the right to the holder to convert them into equity shares after a specific period of time. Such right is mentioned in the debenture certificate. The issue of convertible debentures must be approved by a special resolution in a general meeting before they are issued to the public. These debentures are advantageous for the holder. Because of this conversion right, the convertible debenture holder is entitled to equity shares at a rate lower than market value.
  8. Non-convertible Debentures: Non-convertible debentures are not convertible into equity shares on maturity. These debentures are redeemed on the maturity date. These debentures suffer from the disadvantage that there is no appreciation in value.
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