Page 24 - DMGT409Basic Financial Management

Unit 2: Source of Finance

2. Maturity: The debenture capital is a cheapest source of long-term finance, but it should be Notes

repaid after a specific period. In other words, debentures are issued for a specifi c period
(i.e., 10 years or 5 years debentures).
3. Redemption: Debentures can be repaid either in installment wise or lump sum. If it is repaid
in one lump sum amount, it can be done by creation of debenture redemption reserve. It is
compulsory for all debentures whose maturity period exceeds 18 months.

!

Caution Company should create dividend redemption reserve (DRR) equivalent to at least
50 per cent of the amount of issue before commencement of repayment.

4. Debenture Indenture: A debenture indenture is a legal document, which specifies the rights
of both the issuing company and the debenture holder.
5. Security Interest: Debenture may be either secured or insecured. In India most of the
debentures are secured debentures.
6. Convertibility: Companies can also issue convertible debentures. It is the debenture that is
convertible into equity shares at the option of the debenture holder.
7. Credit Ratings: Before issue of debentures to the public, the issuing company needs to get
the debentures rated by anyone of the credit rating agencies.

Note The key four credit rating agencies in India are: Credit Rating Information Services
Of India Limited (CRISIL), Investment Information and Credit Rating Agency of India
Limited (ICRA), Credit Analysis and Research Limited (CARL), FITCH India and Duff &
Phelps Credit Rating India Pvt. Ltd (DCRI).

8. Claim on Income and Assets: Debenture holders have priority of claim on income. At the
same time they also have priority of claim on company assets at the time of winding up.

Types of Debentures

The given below are the some important types of debentures:
1. Bearer Debentures: Bearer debentures are registered and are payable to the bearer. They
are negotiable instruments and are transferable by delivery.
2. Registered Debentures: They are payable to the registered holder whose name appears both
on the debentures and in the Register of Debenture Holders maintained by the company.

3. Secured Debentures: Debentures which create a change on the assets of the company which

may be fi xed or floating are known as secured Debentures.
!
Caution The term “bonds” and “debentures”(secured) are used interchangeably in
common parlance. In USA, BOND is a long-term contract which is secured, whereas a
debenture is an unsecured one.
4. Unsecured or Naked Debentures: Debentures which are issued without any charge on assets
are insecured or naked debentures. The holders are like unsecured creditors and may see
the company for the recovery of debt.

LOVELY PROFESSIONAL UNIVERSITY 17