What Is a Debenture, and How Does It Work?

This collateral acts as a security net, ensuring that, in case of default by the issuer, the debenture holders have a claim over the specified assets. These debentures come with a clear maturity date, post which they’re slated to be repaid. Companies are obligated to repay the principal amount to debenture holders on this maturity date. Applying this test, the Supreme Court observed that CCDs must be
converted into equity shares upon maturity and therefore, the
possibility of repayment of the principal amount does not arise. Consequently, the Supreme Court held that CCDs would be treated as
equity and not debt. Debentures are not generally issued with attractive terms, the services of debenture trustees are not available and the debentures cannot be converted into cash quickly.

Redeemable debentures clearly spell out the exact terms and date by which the issuer of the bond must repay their debt in full. Irredeemable (non-redeemable) debentures, on the other hand, do not hold the issuer liable to repay in full by a certain date. Because of this, irredeemable debentures are also known as perpetual debentures. A debenture in very simple terms is an agreement between a lender and a borrower which is registered at Companies House and lodged against your company’s assets.

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A bearer debenture, in contrast, is not registered with the issuer. The owner (bearer) of the debenture is entitled to interest simply by holding the bond. The debenture is sometimes called a ‘floating charge debenture’ and includes all company assets.

• Debentures may be issued at par, at discount, or at premium, as in the case of shares.
• All securities involve risk and may result in significant losses.
• And, hence, it discloses the principal debt amount and interest payable on it.
• All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
• Debentures are basically debt financial instruments that are issued by private companies.

Debentures, which may make periodic interest payments, as with other bonds, are documented in what is called an indenture. That is a legal contract between bond holders and issuers that specifies debt offering features such as its interest calculation method, payment timing, and maturity date. Also, governments and corporations often utilize debentures to fund major expansions and projects over the long term.

Is a Debenture an Asset or a Liability?

Whether this is optional or required depends on the terms of the debenture. Convertible debentures may be attractive to investors who are interested in eventually owning an equity stake in the company. Subsequently, the highway project ran into financial
difficulties and CIRP proceedings were initiated against ICTL. By
this time, the CCDs had matured and were automatically convertible
into equity shares of ICTL. Even then, IFCI claimed that its
investment in the form of CCDs constituted debt and hence, it
should be treated as a ‘financial creditor’ in the CIRP.

Fund Flow Statement: Meaning, Definitions, Characteristics, Objectives, Sources, Uses, Difference, Importance, Limitation

Registered debentures are filed in the register kept by companies. The various details comprise the name of holders, addresses, and particulars of holders. When the date of redemption is given for debentures, these are redeemable consignment sale definition debentures. The debentures carrying no specific time of redemption are irredeemable debentures with the perpetual feature. This financial instrument is known for flexibility as it can be modified as per one’s requirement.

Which of these is most important for your financial advisor to have?

In a sense, all debentures are bonds, but not all bonds are debentures. Whenever a bond is unsecured, it can be referred to as a debenture. To understand what a debenture is, it’s helpful to review the various ways that companies can borrow money. A “secured” debt is a type of bond that is backed by something.

Why You Can Trust Finance Strategists

Relying on
the test in Narendra Kumar Maheshwari, it held that unlike
CCDs, an OCD holder has an option to choose whether it wants its
principal amount repaid or converted into equity. Since the option
contemplates repayment of the principal amount upon maturity, the
SEBI concluded that OCDs would be treated as debt and not
equity. At first blush, it might seem like investing in debentures is a worse deal.

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Debenture is used to issue the loan by government and companies. The loan is issued at the fixed interest depending upon the reputation of the companies. When companies need to borrow some money to expand themselves they take the help of debentures. Let us learn the Debenture, features of debentures, advantages, and disadvantages of debentures in detail.