Features of a debenture

Following are the features of a debenture

1. Issue: In India, debentures of various kinds are issued by the corporate bodies, Government, and others as per the provisions of the Companies Act, 1956 and under the regulations of the SEBI. Section 117 of the Companies Act prohibits issue of debentures with voting rights. Generally, they are issued against a charge on the assets of the company but at times may be issued without any such charge also. Debentures can be issued at a discount in which case, the relevant particulars are to be filed with the Registrar of Companies.

2. Negotiability: In the case of bearer debentures the terminal value is payable to its bearer. Such instruments are negotiable and are transferable by delivery. Registered debentures are payable to the registered holder whose name appears both on the debenture and in the register of debenture holders maintained by the company. Further, transfer of such debentures should be registered. They are not negotiable instruments and contain a commitment to pay the principal and interest.

3. Security: Secured debentures create a charge on the assets of the company. Such a charge may be either fixed or floating. Debentures that are issued without any charge on assets of the company are called ‘unsecured or marked debentures’.

4.  Duration: Debentures, which could be redeemed after a certain period of time are called Redeemable Debentures. There are debentures that are not to be returned except at the time of winding up of the company. Such debentures are called Irredeemable Debentures.

5. Convertibility: Where the debenture issue gives the option of conversion into equity shares after the expiry of a certain period of time, such debentures are called Convertible Debentures. Non-convertible Debentures, on the other hand, do not have such an exchange facility.

6. Return: Debentures have a great advantage in them in that they carry a regular and reasonable income for the holders. There is a legal obligation for the company to make payment of interest on debentures whether or not any profits are earned by it.

7. Claims: Debenture holders command a preferential treatment in the matters of distribution of the final proceeds of the company at the time of its winding up. Their claims rank prior to the claims of preference and equity shareholders.