Q.14. What is debenture? Discuss its various kinds?
In the beginning, if the company could not collect much capital or if the company needs more funds for expansion at a later stage, it may raise funds by selling debentures or bonds. The debenture is a document-representing loan taken by the company. The purchasers of debentures are not called shareholders and they do not bear any risk of profit or loss. They are paid an interest on these debentures at fixed rates for a stipulated period. They are creditors of the company.
KINDS OF DEBENTURES
Following are the kinds:
Simple naked debentures are issued without security. Naked/simple debentures have no guarantee of repayment of capital and interest. These are not popular in modern era.
Mortgage debentures are secured by a mortgage and the real property of a company. In case of non-payment, a debenture holder has legal right to sell the property of a company.
KIND OF MORTGAGE DEBENTURE
(A) FIRST MORTAGAGE DEBENTURE
Such debenture holders have first right to claim on the property of the company.
(B) SECOND MORTAGAGE DEBENTURE
Such debenture holders have second right to claim on the assets of the company.
The names and addressed of registered debenture holders are recorded in the register of the company. Transfer and transmission of these must be registered (written) in the book of the company as in the case of shares. Interest is paid to the registered debentures holder in the same way as distribution of dividend.
UN-REFISTERED OR BEARIER RDEBENTURE
These are not registered in the company register. These are transferable. The holder of debenture can receive the capital and interest.
The debenture that is repayable after a specified period is called redeemable debentures.
The debentures that are not payable during the 1ifeme of the company are called irredeemable debentures.
These may be converted into preference or ordinary shares.
In case of profit, company gives profit at a fixed rate only out of the current year’s profit. In case of no profit no interest is being paid.
EQUIPMENT TRUST DEBENTURFE
Equipment trust debentures are issued to raise funds for the purchase of new machinery of a business. Which supplied the only needed condition further for his being robbed.