Introduction
Typically, a company can issue shares to raise capital. However, the money
generated through the sale of shares is rarely sufficient to cover a company’s
long-term financial requirements. As a result, the majority of firms rely on
issuing debentures, which are sold either through a private placement or to the
general public. Debentures, also referred to as long-term debt, are a method of
raising money. Moreover, the issuance of debentures to the public is similar to
that of equity shares. Further, there are several types of debentures classified
on a specific basis. This article deals with the classification of debentures and
other related aspects.
Meaning of debenture
The Latin term “debere,” which means to borrow, is the root for the English
term “debenture.” A firm can borrow money from the general public by issuing
certificates for a specified period of time and at a fixed rate of interest if it
needs money for expansion and growth without raising its share capital. This is
referred to as a debenture. In simple words, a debenture is a written document
that bears the company’s common seal and acknowledges a debt. It includes a
contract for the payment of interest at a given rate due often either half-yearly
or annually on fixed dates, as well as for the repayment of principal after a pre-
determined period of time, at intervals, or at the company’s discretion.
As per Section 2(30) of the Companies Act, 2013, a “debenture” is any security
issued by a company, including bonds, debenture inventory, and other
securities, irrespective of it constituting a charge on the assets of the company.
, Features of debentures
Commitment: It is a commitment made by a firm that it would pay
the holder of the debenture a specific amount of money.
Face Value: A debenture’s face value often bears a large
denomination. It is a multiple of 100 or is 100.
Repayment: They are issued with a due date that is specified on the
debenture certificate. At the time of maturity, the debenture’s principal
is paid back.
Priority in Repayment: Debenture holders have preference over all
other claims to the company’s capital when it comes to repayment.
Assurance of Repayment: A debenture is a long-term obligation.
They come with a guarantee of payment by the due date.
Interest: For debentures, an agreed-upon set rate of interest is paid
on a regular basis. The corporation has a set obligation to pay interest.
Regardless of whether the firm earns a profit or not, it must be paid by
the company.
Types of Debenture
A company has the authority to issue different types of debentures that depend on their
objectives and requirements. The following are the types of debentures based on:
1. Security Based Debenture
Secured Debentures: These are issued against collateral security. The debenture can
liquidate the asset in case of borrower default.
Unsecured Debentures: These are issued by leveraging the goodwill and
creditworthiness of a company. These debentures have no collateral. Hence, they are referred
to as unsecured debentures.
2. Tenure Based Debenture
Redeemable Debentures : These have a date of redemption. It is mentioned on the
certificate. The borrower must repay before the redemption date.
Typically, a company can issue shares to raise capital. However, the money
generated through the sale of shares is rarely sufficient to cover a company’s
long-term financial requirements. As a result, the majority of firms rely on
issuing debentures, which are sold either through a private placement or to the
general public. Debentures, also referred to as long-term debt, are a method of
raising money. Moreover, the issuance of debentures to the public is similar to
that of equity shares. Further, there are several types of debentures classified
on a specific basis. This article deals with the classification of debentures and
other related aspects.
Meaning of debenture
The Latin term “debere,” which means to borrow, is the root for the English
term “debenture.” A firm can borrow money from the general public by issuing
certificates for a specified period of time and at a fixed rate of interest if it
needs money for expansion and growth without raising its share capital. This is
referred to as a debenture. In simple words, a debenture is a written document
that bears the company’s common seal and acknowledges a debt. It includes a
contract for the payment of interest at a given rate due often either half-yearly
or annually on fixed dates, as well as for the repayment of principal after a pre-
determined period of time, at intervals, or at the company’s discretion.
As per Section 2(30) of the Companies Act, 2013, a “debenture” is any security
issued by a company, including bonds, debenture inventory, and other
securities, irrespective of it constituting a charge on the assets of the company.
, Features of debentures
Commitment: It is a commitment made by a firm that it would pay
the holder of the debenture a specific amount of money.
Face Value: A debenture’s face value often bears a large
denomination. It is a multiple of 100 or is 100.
Repayment: They are issued with a due date that is specified on the
debenture certificate. At the time of maturity, the debenture’s principal
is paid back.
Priority in Repayment: Debenture holders have preference over all
other claims to the company’s capital when it comes to repayment.
Assurance of Repayment: A debenture is a long-term obligation.
They come with a guarantee of payment by the due date.
Interest: For debentures, an agreed-upon set rate of interest is paid
on a regular basis. The corporation has a set obligation to pay interest.
Regardless of whether the firm earns a profit or not, it must be paid by
the company.
Types of Debenture
A company has the authority to issue different types of debentures that depend on their
objectives and requirements. The following are the types of debentures based on:
1. Security Based Debenture
Secured Debentures: These are issued against collateral security. The debenture can
liquidate the asset in case of borrower default.
Unsecured Debentures: These are issued by leveraging the goodwill and
creditworthiness of a company. These debentures have no collateral. Hence, they are referred
to as unsecured debentures.
2. Tenure Based Debenture
Redeemable Debentures : These have a date of redemption. It is mentioned on the
certificate. The borrower must repay before the redemption date.
