1. introduction : Joint stock company’s keep on needing finance for a long period of time. Company can satisfy the need of finance in two ways. (1) Owner’s funds (2) Borrowers funds.
When the company issues equity shares and raises funds it is known as owners funds, but when company issues Debentures and Bonds it is said to be borrowed funds.
By issuing debentures company can raise funds for a long period of time. It creates floating charge on assets. Debenture is debt of the company. Company has to pay interest on it regularly.
2. What is the debenture : The word Debenture has been originated from word Debere, which means Debt. Thus, Debenture is a debt acknowledging document.
As per Sir Francisn Parmer, “Debenture is a type of document issued under the common seal of the company acknowledging the debt.”
Debenture is a document containing an acknowledgement of indebtedness; issued by the company under its common seal and giving an undertaking to repay the debt, at a specified rate or at the option of the company and in the meantime to pay interest, thereon at a fixed and at interval stated in debentures.
- From the meaning, following Points can be understood:
(1) issued under the common seal of the company.
(2) acknowledging the debt of a specified amount.
(3) in which till the principle amount is repaid.
(4) interest at specified rate is payable under the contract
(5) a charge is created on the assets of the company.
Thus, joint stock companies established under the companies Act issue debentures for long term capital requirement. The debenture can be reedemed after a fixed period. A relationship of debtor and creditor is created between the company and the debenture holder. The debenture holder does not get a right to vote in the company and he cannot participate in the management of the company, but they can appoint debenture trustees to safeguard their interest. When company goes into liquidation the debenture holders are paid their money on priority basis by selling the assets of the company.
3. Types of Debentures : For the convinience of public, the company management issues different types of Debentures. (1) Mortgage Debenture (2) Fully Convetible Debenture (FCD) (3) Partly Covertible Debenture (PCD) (4) Non Convertible debenture (NCD)
(1) Mortgage Debenture : The company by issuing such debentures, create a charge on the assets which can be fixed charge or floating charge. The company has to obtain the approval of the trustee of debenture holders, before taking any decision regarding these assets. At the time of liquidation the debenture holders have the first right on the assets of the company.
(2) Fully Convertible Debentures (FCD) : In accordance with the agreement with debenture holders, on completion on the specified time period these debentures are converted into equity shares. The company gives two options to holders (1) To redeem the debentures (2) To take equity shares of the same amount. If the debenture holder opts for fully convertible debentures then his rights as creditor come to an end and he gets rights as equity share holder.
(3) Partly Convertible Debenture (PCD) : Here debentures are divided into two parts, where one part is fully convertible and the other part is non-convertible. Equity shares are issued against the convertible part while the non convertible part is reedemed.
(4) Non Convertible Debenture (NCD) : The debenture are not converted into equity shares. The holders are paid their money back by redemption at the end of the specified time period.