Issue Of Debentures

Bearer debentures are negotiable instruments that do not include the name of the owner on the certificate. The person who physically holds the debenture certificate is considered the legal owner. These debentures can be transferred simply by handing over the certificate, without any formal transfer procedure. Interest on bearer debentures is paid to the holder who presents the attached interest coupon. They offer convenience and anonymity to investors but also involve higher risk of loss or misuse due to their bearer nature.

Debentures represent borrowed capital, therefore the company must pay a fixed return known as interest. This payment is compulsory and treated as an expense in the profit and loss account. It is different from dividends because dividends depend on profit availability, but interest must be paid regardless of profit. Debentureholders are creditors, not owners, so their return is a cost of borrowing. Interest ensures that the company compensates them for using their money for business operations. Hence, the return on debentures is always referred to as interest.

From the point of view of convertibility, debentures are classified into two main types. The first type is convertible debentures. These debentures can be converted into shares of the company after a specified period, either fully or partially. Their conversion terms are stated at the time of issue, and conversion gives the investor an opportunity to become a shareholder. The second type is non-convertible debentures. These cannot be converted into shares and remain a debt instrument until maturity. Non-convertible debentures usually offer a higher rate of interest because they lack the benefit of conversion. These two types provide companies and investors with flexible financing and investment options.

From the security point of view, debentures are classified into two categories. The first type is secured debentures. These debentures are backed by a charge on the company's assets, which may be fixed or floating. If the company fails to pay interest or principal, debentureholders can claim the secured assets. The second type is unsecured debentures, also known as naked or simple debentures. These do not carry any charge on assets and rely entirely on the creditworthiness and reputation of the company. Because unsecured debentures carry higher risk, they generally offer a higher rate of interest to attract investors. Both types help companies raise long-term funds based on their financial strength and security structure.

Owned capital refers to funds provided by shareholders such as share capital and reserves. Debentures, however, are borrowed funds raised from creditors. Debentureholders receive fixed interest and repayment of principal, but they do not hold ownership rights. They are lenders and not owners. Therefore, debentures form part of borrowed capital, not owned capital. Companies must repay debentures regardless of profit, which distinguishes them further from owner-based funds.