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Meaning of Debenture

A debenture is a bond issued by a company under its seal, acknowledging a debt and containing provisions as regards repayment of the principal and interest.


Features of Debentures

 1.  It is a document which evidences a loan.

2.  It is a fixed interest-bearing security.

3.  Interest is payable at a predetermined fixed rate.

4. The original sum is repaid at a specified future date or it is converted into shares or other debentures.

5.      It may or may not create a charge on the assets.

6.       It can generally be bought or sold through the stock exchange.

Distinction Between Debentures and Shares

1.  Creditors of the company

2.  Have no voting rights

3. Interest is paid at a predetermined fixed rate. It is payable, whether there is any profit or not.

4.  Interest on debentures are the charges against profits.

5.  There are different kinds of debentures, such as secured/ unsecured; redeemable/ irredeemable; registered/ bearer; convertible / non-convertible, etc.

6.  Debentures are shown under “secured laws”

7.  Debentures can be converted into shares

1.  Owners of the company.

2.  Have voting rights.

3.  Dividend on equity shares is paid at a variable rate which is vastly affected by the profits of the company.

4.  Dividends are appropriation of profits.

5.  There are only two kinds of shares – Equity shares and preference shares.



6.   Shares are shown under “Share capital”.

7. Shares cannot be converted into debentures.

Types of Debentures

1.          Security

      (a) secured debentures

      (b) unsecured or “naked” debentures


2.          Convertibility

      (a) convertible debentures

      (b) non-convertible debentures


3.          Permanence

      (a) redeemable debentures

      (b) irredeemable debentures


4.          Negotiability

      (a) registered debentures

      (b) bearer debentures


5.          Priority

      (a) first mortgage debentures

      (b) second mortgage debentures

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