Sources of Business Finance — OCM STD 11 Commerce — Question
Gujarat BoardEnglish MediumSTD 11 CommerceOCMSources of Business Finance5 Marks
Question
Give the meaning of Debenture and state its types.
✓
Answer
Introduction :
Debenture is a borrowed capital of a company.
Management issues various types of debentures to obtain capital easily from public.
Some debentures are secured debentures. Some are converted in to Equity Shares.
They contain attractive conditions of the rate of interest and refund of capital.
Meaning of Debenture :
Debenture is the borrowed capital obtained by the company. it is debt of the company.
It can be known as loan also. Like share capital borrowed capital is distributed in certain equal parts. Each part is known as 'debenture'.
Debenture holders are the creditors of the company.
Company gives debt certificate to all its debenture holders. It includes the amount, rate of interest, date of repayment of debenture and other conditions. Debenture is used as a sources of long term and medium term finance.
Types of Debenture : Main two types of debenture can be noted as under :
From the view point of Safety :
Debenture holders are the creditors of the company.
From the view point of the safety of their money, debentures are of two types.
Secured Debenture :
Company has mortgaged the property of the company against the total amount of debentures are called secured debentures.
At the time of dissolution of the company, the company sells the property and refunds the amount to the debenture holders have full trust that they will be repaid their money.
Unsecured Debenture :
While issuing the debentures company has of its property are called unsecured debentures. Such debtors are called unsecured lenders.
Types of Debenture from the view point of Conversion into Share
Company’s attract investors to invest in debentures with the condition to convert Debenture into a fixed period. From this view point debentures are of two types.
Convertible Debenture :
The debentures which are completely or partly converted into equity shares, after a fixed period are called 'Convertible Debentures'.
Fully Convertible Debenture $(F.C.D.)$
The total amount of type of debenture is converted into equity share after a fixed period.
Partly Convertible Debentures $(P.C.D.)$ :
The total amount of the debenture is divided into two parts.
As stated in the certificate certain portion of the amount is converted into shares and the remaining amount is refunded at the end of the fixed period.
Non-Convertible Debenture $(N.C.D.)$ :
The debentures which are not converted into equity shares and at the end of the fixed period, the amount is refunded to the debenture holders are called non-convertible debentures.
Conclusion :
The different types of debentures are issued to attract investors. Sometimes there are two types of
debentures issued at the same time. e.g. Secured and Convertible Debentures.
Sometimes to attract investors effective attractive rate of interest and its conditions are offered to make it
more effective.
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