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ACCOUNTANCY Chapter 2: Issue Of Debentures
(1) 02 ISSUE OF DEBENTURES ISSUE OF DEBENTURES Introduction to Debentures ● Meaning and Characteristics of Debentures: Meaning of Debentures as per Section 2(30) of the Companies Act, 2013: Debenture includes debenture stock, bonds and any other instrument of the company evidencing a debt, whether constituting a charge on the assets of the company or not. ● Understanding Debentures and Debenture holders: i. Debentures: ● It is a document known as Debenture Certificate. ● It is an acknowledgement of debt by the company. ● It is an agreement between the company and its debenture holders for repayment of the principal amount on a specified date along with interest at a pre-determined rate charged on the principal amount until the principal is repaid. ● It is an evidence of a debt to the holder usually arising out of a loan and mostly secured by a charge. ii. Debenture holders: ● They are the persons to whom debentures are issued by a company. ● These persons are lenders to the company as they provide funds in exchange of debentures issued to them. ● Characteristics or Features of a Debenture: i. A document known as Debenture Certificate. ii. An acknowledgement of debt by the company. iii. Involves an agreement between the company and its debenture holders to fix the mode and period of repayment of principal and interest. iv. It is a common practice to prefix 'Debentures' with the rate of interest like if the rate of interest is 10%, the title of the debentures will be '10% Debentures'. v. It is treated as an external equity or long term borrowings by the company.
(2) 02 ISSUE OF DEBENTURES vi. It is usually secured by way of charge on the assets of the company. vii. The interest charged on debentures is a charge against profit. ● Meaning of a Bond: Bond is similar to debenture, both in terms of contents and texture. It is an acknowledgment of debt issued by the company and signed by an authorized signatory. Traditionally, bonds were issued by the Government. But these days, bonds are also being issued by semi-government and non-government organisations as an acknowledgement of debt. ● Difference between Share and Debenture:
(3) 02 ISSUE OF DEBENTURES ● Difference between Shareholder and Debentureholder: Following are the points of difference between Shareholders and Debentureholders. Debentureholder Shareholder Debentureholder is the lender of the company A shareholder is the owner of the company. A debentureholder gets interest on his investment at the specified rate whether the company earns a profit or not. A shareholder gets a dividend. A debentureholder has no right to control the activities of the company by voting or otherwise A shareholder has a right of control over the working of the company by attending and voting in the General Meeting. Debentureholders are relatively safe. Secured debentureholders are almost free from risk. Shareholders are at a greater risk. They can even lose the amount invested in shares. Types of Debentures Types and disclosure of Debentures in Balance Sheet: ● Following are the different kinds of debentures classified based on: i. Security point of view: ● Secured: Such debentures are secured by either a fixed charge or a floating charge on the assets of the company. Such charge is to be registered with the Registrar of the Companies. ● Unsecured: Such debentures are not secured by any charge on assets of the company. ii. Redemption/Permanence point of view: ● Redeemable: Such debentures are repayable by the company at the end of a specified period or by instalments during the existence of the company. ● Irredeemable: Such debentures are not repayable during the lifetime of the company and are repayable only when the company is liquidated. iii. Records/Negotiability point of view: