Issue of Debentures

What is the Issue of Debentures?

The issue of Debentures seems to be much alike to the issue of shares by an enterprise. Here, the money can be accumulated either in lump sum or in instalments. The accounting treatment of the 2 is quite alike. Now, the debentures can be either issued for some other considerations or cash. Often issue or circulation of debentures is done as collateral security.

(A) MEANING OF DEBENTURE

  • Debenture is a written instrument acknowledging a debt under the common seal of the company
  • It contains a contract for repayment of principal after a specified period and for payment of interest at a fixed rate

(B) CHARACTERISTICS OF A DEBENTURE

(i) LOAN

  • Debenture is an instrument of loan.

(ii) FIXED RATE

  • Interest is paid at a fixed rate every year and debentures is known as “fixed cost bearing capital”.

(iii) COMMON SEAL

  • Debenture has a common seal of the company.

(iv) REDEMPTION

  • Debenture is redeemable at a fixed and specified time.

(v) CREDITORS

  • Debenture-holders are the creditors of the company, not owners.

(vi) VOTING POWER

  • Debenture-holders have no right to cast vote in the company’s general meeting.

(vii) PRIORITY

  • At the time of liquidation, the first priority is given to debenture-holders at the time of repayment.

(C) KINDS OF DEBENTURES

1. FROM THE POINT OF VIEW OF ‘SECURITY’

(i) SECURED DEBENTURES

  • The debentures which are secured by a charge on the assets or property of the company are known as secured debentures.
  • It is aDebt security backed by a specific asset of the issuer
  • If the company fails to pay the interest or principal amount, then debenture holders can sell the assets in order to satisfy their claims. They are known as Mortgage Debentures.

(ii) UNSECURED DEBENTURES

  • The debentures which do not carry any charge or security on the assets of the company, are known as unsecured debentures
  • In case of any default in payment, debenture holders can only file a suit for recovery of money. They are also known as Naked Debentures.

2. FROM THE POINT OF VIEW OF ‘TIME’

(i) REDEEMABLE DEBENTURES

  • These are those debentures which are repayable at the end of the specified period, either in lump-sum or in instalments during the lifetime of the company

(ii) IRREDEEMABLE DEBENTURES

  • These are those debentures which are not repayable during the lifetime of the company and are repaid only on the winding u of a company

3. FROM THE POINT OF VIEW OF ‘CONVERTIBILITY’

(i) CONVERTIBLE DEBENTURES

  • The debentures which can be converted into equity shares after the expiry of a specified period, are known as convertible debentures

(ii) NON-CONVERTIBLE DEBENTURES

  • The debentures which cannot be converted into equity shares, are known non-convertible debentures

4. FROM THE POINT OF VIEW OF ‘COUPON RATE’

(i) SPECIFIC COUPON RATE DEBENTURES

  • These debentures are issued with a specific rate of interest, which is called as the Coupon rate
  • This rate may be fixed or floating

(ii) ZERO COUPON RATE DEBENTURES

  • These debentures don’t carry a specific rate of interest.
  • In order to compensate the investors, such debentures are issued at a substantial discount

5. FROM THE POINT OF VIEW OF ‘REGISTRATION’

(i) REGISTERED DEBENTURES

  • The debentures in which the names of debenture holders are duly recorded in the register maintained by the company are known as registered debentures

(ii) BEARER DEBENTURES

  • The debentures which can be transferred by mere delivery are known as bearer debentures.

6. FROM THE POINT OF VIEW OF ‘PRIORITY’

(i) FIRST DEBENTURES

  • Debentures which are repaid before other debentures are repaid.

(ii) SECOND DEBENTURES

  • Debentures which are paid after the other debentures are paid.

The issue of Debentures for Cash

Debentures in accustomed progress of the business concern are circulated for cash. Circulation of debentures that occurs can be categorised into 3 types, like the issue of shares at a discount, at a premium and at par.

The issue of Debentures at Discount

When the debentures are circulated below the face value, this type of circulation of debentures is called a discount issue. Say, for instance, the debenture possesses a nominal value of 200/- but is issued for 190/-. This type of debentures is known to be issued at a discount.

The issue of Debentures at Premium

The issue of debentures at a premium is when the money is charged more than the nominal value. The premium amount charged to a special a/c is known as Securities Premium Reserve A/c. This account shall be depicted on the liabilities side of the Balance Sheet below the heading Reserves and Surplus. So, if a debenture with a face value of 200/- is sold at 210/- then it is circulated at a premium.

The above mentioned is the concept, that is elucidated in detail about the Issue of Debentures for the class 12 Commerce students. To know more, stay tuned to BYJUS.

3-4 MARKS QUESTIONS

Q.1- WHAT DO YOU MEAN BY DEBENTURE? STATE THE FEATURES OF DEBENTURE.

ANSWER:

(A) MEANING OF DEBENTURE

  • A debenture is a written tool acknowledging a debt of the company
  • It contains a contract for repayment of principal after a specified period and for payment of interest at a fixed rate

(B) CHARACTERISTICS OF A DEBENTURE

(1)LOAN

  • A debenture is a tool of loan.

(2)FIXED RATE

  • Fixed interest rate every year. A debenture is also known as “fixed cost bearing capital”.

(3)COMMON SEAL

  • Debenture has a common seal of the company.

(4)REDEMPTION

  • After a fixed and definite time debenture is redeemable

(5)CREDITORS

  • Debenture-holders are the creditors of the company.

(6)VOTING POWER

  • Debenture-holders do not have the right to vote in the company’s general meeting.

(7)PRIORITY

  • At the time of liquidation and repayment the first preference is given to the debenture-holders.

Q.2- WHAT ARE THE DIFFERENCES BETWEEN SHARE AND DEBENTURE?

ANSWER:

BASIS

SHARE

DEBENTURE

1. OWNERSHIP

A share is a part of the owned capital. So, a shareholder is an owner of the company

A debenture is a part of the borrowed capital. So, a debenture holder is only a creditor.

2. RETURN

The return on shares is known as a dividend, (which is the part of the profits of the company)

The return on debentures is known as interest, which is fixed from the day of issue of debentures

3. CHARGE Vs. APPROPRIATION

The payment of a dividend is an appropriation out of profits

The payment of interest is a charge and is to be paid even if there is no profit

4. REPAYMENT

The amount of share is not returned during the life of the company

Debentures are issued for a fixed period and the amount is returned after that period

5. SECURITY

Shares are not secured by any charge on assets

Debentures are generally secured and carry a fixed or floating charge over the assets of the company

6. CONVERTIBILITY

Shares cannot be converted into debentures

Debentures can be converted into shares

7. VOTING RIGHTS

Voting rights are available to Shareholders

Debenture holders do not normally enjoy any voting right

Q.3- STATE THE DIFFERENT KINDS OF DEBENTURES.

ANSWER:

1. FROM THE POINT OF VIEW OF ‘SECURITY’

(i) SECURED DEBENTURES

  • The debentures which are secured by a charge on the assets or property of the company are known as secured debentures.
  • It is aDebt security backed by a specific asset of the issuer
  • If the company fails to pay the interest or principal amount, then debenture holders can sell the assets in order to satisfy their claims. They are known as Mortgage Debentures.

(ii) UNSECURED DEBENTURES

  • The debentures which do not carry any charge or security on the assets of the company, are known as unsecured debentures
  • In case of any default in payment, debenture holders can only file a suit for recovery of money. They are also known as Naked Debentures.

2. FROM THE POINT OF VIEW OF ‘TIME’

(i) REDEEMABLE DEBENTURES

  • These are those debentures which are repayable at the end of a specified period, either in lump-sum or in installments during the lifetime of the company

(ii) IRREDEEMABLE DEBENTURES

  • These are those debentures which are not repayable during the lifetime of the company and are repaid only on the winding up of the company

3. FROM THE POINT OF VIEW OF ‘CONVERTIBILITY’

(i) CONVERTIBLE DEBENTURES

  • The debentures which can be converted into equity shares after the expiry of a specified period, are known as convertible debentures

(ii) NON-CONVERTIBLE DEBENTURES

  • The debentures which cannot be converted into equity shares, are known non-convertible debentures

4. FROM THE POINT OF VIEW OF ‘COUPON RATE’

(i) SPECIFIC COUPON RATE DEBENTURES

  • These debentures are issued with a specific rate of interest, which is called Coupon rate
  • This rate may be fixed or floating

(ii) ZERO COUPON RATE DEBENTURES

  • These debentures don’t carry a specific rate of interest.
  • In order to compensate the investors, such debentures are issued at a substantial discount

5. FROM THE POINT OF VIEW OF ‘REGISTRATION’

(i) REGISTERED DEBENTURES

  • The debentures which contain the names of debenture holders are duly recorded in the register maintained by the company are known as registered debentures

(ii) BEARER DEBENTURES

  • The debentures which can be transferred by mere delivery are known as bearer debentures.

6. FROM THE POINT OF VIEW OF ‘PRIORITY’

(i) FIRST DEBENTURES

  • Debentures which are repaid before other debentures are repaid.

(ii) SECOND DEBENTURES

  • Debentures which are paid after the first debentures are paid.

MULTIPLE CHOICE QUESTIONS

Q.1- Debentures contains the contract of repayment of:

a. Interest

b. Principal

c. Both(a)&(b)

d. None of the above

Q.2- Debentures are ________ for the company.

a. Assets

b. Liabilities

c. Contingent liability

d. Intangible liability

Q.3- From the point of view of TENURE debentures can be classified into-

a. Redeemable

b. Non- redeemable

c. Both (a)&(b)

d. First debenture

Q.4- Debentures which do not carry a specific rate of interest:

a. Specific debentures

b. Bonds

c. Zero-coupon rate debentures

d. Second debentures

Q.5- The debentures, in which the names of debenture holders are duly recorded in the register maintained by the company are known as:

a. bonds

b. registered debentures

c. specific-coupon rate debentures

d. second debentures

ANSWER KEY

1-c, 2-b, 3-c, 4-c, 5-b