Debentures:

• A debenture is a certificate issued by a company to public in order to obtain public money as loan.
• The way a company invites public to buy shares it can ask public to buy debentures.
• The basic difference between a share and a debenture is that a share-holder becomes the part owner of the company whereas a debenture holder becomes creditor of the company from whom the company has taken the money as loan.
• Debentures are issued when company is in need of additional capital but does not want to issue shares. The total capital needed is divided into small parts i.e. debentures and then public is invited to subscribe for them.
• Debenture is a liability to the company. Buyers of debentures become creditors of the company. The company needs to pay them interest at pre-decided rates and period. At the end of the pre-decided time frame the company as per conditions returns the entire money to the debenture holders or convert the money equal to the share value and gives shares to the debenture holders.
• Issuing debentures is a good medium-term as well as long-term nnance option for the company.
• When a company issues debentures it appoints trustees who work for protecting the interests of debenture holders as per the Trust Deed.

Characteristics:

• Creditors of company: Since the amount of debenture is considered as loan debenture is a debt of the company and the debenture holders are the creditors of the company.
• Fixed rate of interest: Debenture holders are paid interest at fixed-rate at a pre-decided time.
• Fixed burden and charge on asset: A Company mortgages assets as security to obtain capital through debentures.
• The company needs to pay interest on debentures to the debenture holders. This interest is considered as a ‘fixed charge on the assets’ or say on the profits. This means that the company has to pay this charge even if it makes no profit. Moreover, company cannot raise loan on such assets unless it fully pays up capital borrowed from debentures. However, it can use the assets.
• Satisfy need: Debenture is a useful tool to satisfy the needs of medium term and long-term finance.
• Registration at stock-exchange: If the debentures are listed at stock-exchange, one can trade them just like shares.
• Repayment: At the end of the duration, the company returns the debenture money to debenture holders either all at once or in installments as per the pre-decided conditions.
• First preference for payment: Since debentures are debt of the company the debenture holders get the preference to receive the money before the share-holders at the time of dissolution of the company.