A company can raise finances by issuing debentures. A debenture may be defined as the acknowledgement of debt by a company. Debentures constitute the borrowed capital of the company and they are known as creditorship securities because debenture holders are regarded as the creditors of the company. The debenture holders are entitled to periodical payment of interest at a fixed rate and are also entitled to redemption of their debentures as per the terms and conditions of the issue.
The word debenture is derived from the Latin word ‘Lebere’ meaning ‘to owe’. In its simplest sense it means a document which either creates or acknowledges a debt.
A debenture may be defined broadly, as “an instrument in writing, issued by a company under its seal and acknowledging a debt for a certain sum of money and giving an undertaking to repay that sum on or after a fixed future date and meanwhile to pay interest thereon at a certain rate per annum of stated Intervals.”
As per Sec. 2 (12) “debenture includes debenture stock, bonds and other securities of a company whether constituting a charge on the assets of the company or not.”
In the words of Chitty J. “Debenture means a document which either creates a debt acknowledges it, and any document which fulfills either of these conditions is a debenture.”
Palmer defines a debenture as “any instrument under seal of the company, evidencing a deed the essence of it being admission of indebtedness”. According to Evelyn Thomas “Debenture is a document under the company’s seal which provides for the payment of the principal sum and interest there on at regular intervals which is usually secured by a fixed or floating charge on the company’s property or undertaking and which acknowledges a company.”
On the analysis of above definitions, a debenture may be defined as an instrument executed by company under its common seal acknowledging indebtedness to some person or persons to secure the sum advanced. Debentures are usually bonds issued by the company in series of a fixed denomination e.g., Rs. 100, Rs. 200, Rs. 500, Rs. 1,000 of face value and are offered to the public by means of a prospectus.
The terms and conditions of ‘debenture issue’ are endorsed on the back of debenture certificate which gives different rights to the holders.
A company may have a debenture stock which is nothing but borrowed money consolidated into one mass for the sake of convenience. Instead of each lender having a separate bond or mortgage, he has a certificate entitling him to a certain sum, being a portion of one large loan.
Debentures or Bonds:
A company may raise long-term finance through public borrowings. These loans are raised by the issue of debentures. A debenture is an acknowledgement of a debt. According to Thomas Evelyn.
“A debenture is a document under the company’s seal which provides for the payment of a principal sum and interest thereon at regular intervals, which is usually secured by a fixed or floating charge on the company’s property or undertaking and which acknowledges a loan to the company’s property or undertaking and which acknowledges a loan to the company”.
A debenture-holder is a creditor of the company. A fixed rate of interest is paid on debentures. The interest on debentures is a charge on the profit and loss account of the company. The debentures are generally given a floating charge over the assets of the company. When the debentures are secured, they are paid on priority in comparison to all other creditors.