Debentures
•
In
corporate finance, a debenture is a medium to long-term debt instrument used by
large companies to borrow money, at a fixed rate of interest. The legal term
"debenture" originally referred to a document that either creates a
debt or acknowledges it, but in some countries the term is now used
interchangeably with bond, loan stock or note.
•
A
debenture is thus like a certificate of loan or a loan bond evidencing the fact
that the company is liable to pay a specified amount with interest and although
the money raised by the debentures becomes a part of the company's capital
structure, it does not become share capital.
•
Debentures
are generally freely transferable by the debenture holder. Debenture holders
have no rights to vote in the company's general meetings of shareholders, but
they may have separate meetings or votes e.g. on changes to the rights attached
to the debentures. The interest paid to them is a charge against profit in the
company's financial statements.
Major Differences Between
Shares and Debentures
- ·
The holder of shares is referred to as a
shareholder while the holder of debentures is referred to as a debenture
holder.
- ·
The shares signify the shareholder’s
ownership in the company whereas debentures signify the company’s indebtedness.
- ·
Share is the company’s capital whereas
Debenture is the company’s debt.
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The return on shares is the dividend,
whereas the return on debentures is the interest.
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Unlike debentures, shares are
inconvertible.
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In the case of winding up, debentures get
priority over shares and are repair prior to the repayment of shares.
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No security charge is formed for payment
of shares. On the other side, a security charge is formed for the payment of
debentures.
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Shares can be issued at a discount with
some legal compliance. Debentures can be issued at a discount in the absence of
any legal compliance.
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In the case of shares, no trust deed is
executed, on the other hand, a trust deed is executed during the issuance of
debentures to the public.
- ·
Shareholders have the voting right,
however, no voting rights are entrusted to the debenture holders.
- ·
The dividend can be paid only from the
current profit made by the business, not otherwise. The company has to pay the
interest on debentures to the debenture holders, whether or not profit is
earned by the company.
There Are Different Types
of Debentures, Which Are as Follows:
·
Secured Debentures
·
Unsecured Debentures
·
Convertible Debentures
·
Non-convertible Debentures
·
Registered Debentures
·
Bearer Debentures
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