What is Debenture? | Characteristics and Utility of Debenture. 

#Debenture Meaning

Debenture is a contract between the lender and the company, under which the company promises to pay the loan taken from the lender along with interest. It contains all the terms and conditions of the loan. 

The word Debenture is derived from the Latin word 'Debere', which means to owe. When a company needs long-term credit for business, it receives money from the public by issuing debentures.

#Debenture Definitions

Definition of Debenture According to Section 2 (30) of the Indian Companies Act, 2013, “Debentures include debentures, bonds, and other securities of the company, whether or not they carry a charge on the property of the company.” 

2. In the words of Naidu and Datta, “A debenture is a form of debenture issued under the common seal of the company which borrows loans and explains the conditions subject to which they are issued and are to be rectified.”

Ideal Definition - "Debenture is a written acknowledgement of debt, on which the company's common seal is printed and in which it is agreed to pay interest at a fixed rate till the principal is paid on a specified date."

#Debenture Characteristics or features 

The salient features of debentures are as follows 

1. Proof of Loan - Debenture is a document/evidence of the loan taken by the company. 2. Fixed rate of interest- Debentures are issued at a fixed rate of interest. 

3. Contract of return - The debenture contains an explanation of the period after which the principal amount is to be paid. 

4. Charges on Assets- Debentures often have their own floating charge on the assets of the company, so they are safe.

5. Long Term Debentures- Debt taken by debentures is of long term nature. 

6. Marking of the common seal- The common seal of the company is printed on each debenture. 

7. Details- Debentures contain all the details, such as period, rate of interest, time of return, type etc. 

8. Period of Interest -Payment Interest on debentures is paid every 6 months. Interest is payable on the debentures, whether profit or loss to the company.

#Status of debentureholders 

In fact, the debenture holders are the creditors of the company. They compulsorily get the loan given by them through debentures and the interest on it. Whether the company is profitable or not. If the company is not able to pay the same under the terms of the issue, the debenture holders can recover their debt by presenting them in court later. They do not have the right to participate in the management and control of the company.

#Debentures Utility or Advantages.

The utility or benefits of debentures can be stated as follows: 

1. Fulfillment of financial needs- If the company needs capital even after the issue of shares, then the company gets the required amount by issuing debentures. 

2. No ownership- Debenture holders do not get voting rights because they do not have ownership of the company.

3. Having a fixed rate of interest - On fixed income debentures lets the company know how much interest it will have to pay and how much interest the debenture holder will continue to earn.

4. Benefit to the Shareholders - After the interest is available on the loan at a low rate of interest, the shareholders get sufficient dividend. 

5. Redemption facility - Redemption of debentures is done when sufficient funds are available with the company. 

6. Security to debenture holders – The assets of the company are in the form of floating charges, so the loan given by it remains safe in case of loss or liquidation. 

7. Free from forfeiture - In case of non-payment of calls, debentures cannot be forfeited.