Page 140 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 6: Debentures: Concept, Types, Issue

5. Any conversion in part or whole of the debentures will be optional at the hands of Notes
debenture-holders, if the conversion takes place at or after 18 months from the date of
allotment, but before 36 months.
6. The premium amount at the time of conversion for PCD shall be predetermined and
stated in the prospectus. The redemption amount, period of maturity, yield on redemption
for the PCDs/NCDs shall be indicated in the prospectus.
7. There is no debt-equity ratio prescription now.
8. The repurchase procedure of NCDs must be stated at the time of issue itself.

9. In case one series of debentures is extinguished by another series, debenture-holders must
have the right to opt out and receive the cash. There must be credit rating six months
before the debentures are rolled over.

6.3 Distinction between Share and Debenture

Shares and debentures can be distinguished on the basis of the following points:
1 Ownership Security vs Creditors Security: A person having a share is called a shareholder
and has ownership security while a person having a debenture is called a debenture-
holder, who is creditor of the company.

2. Return on Investment: A debenture-holder will get a fixed rate of interest on debentures.
This is paid in all circumstances whether there is a profit or loss. Shareholders will receive
a part of the profit in the form of dividend. This dividend depends upon the profit of the
company. It can be more or less; it is always declared by the directors, out of the profits.
3. Priority as to repayment of principal on liquidation: In the case of winding up of the
company, the amount of debentures will be redeemed before any amount is paid to
shareholder to refund share capital.

4. Secured by charge: Shares are not secured, while the debenture can be secured or mortgaged
(i.e. secured by assets).
5. Restrictions on issue at the discount: There are some restrictions on the issue of shares at
discount but there is no restriction on issue of debentures at discount.
6. Voting Right: A shareholder is the owner of the company and has a voting right and also
takes part in the management of the company, while a debenture-holder is a creditor of
the company and cannot take a part in management.
7. Convertibility: Equity shares can never be converted into debentures, while debentures
can be converted into shares at the discretion of the debenture-holders.
8. Redemption: A debenture-holder may get refund during the lifetime of the company,
while the equity share-holder cannot claim refund on his shares during the lifetime of the
company.

Did u know? In case one series of debentures is extinguished by another series, debenture-
holders must have the right to opt out and receive the cash. There must be credit rating six
months before the debentures are rolled over.

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