Define Debenture and Explain the Features of Debentures | 12th HSC Secretarial Practice (S.P.) Chapter 2
The question "Define Debenture and explain the features of Debentures" is a core 8-mark long answer question from Maharashtra State Board (MSBSHSE) 12th Standard HSC Secretarial Practice (S.P.) Chapter 2: Sources of Corporate Finance. In the HSC Board Examination, this question regularly appears in Question 8 (Answer the Following) for 8 Marks (or in Question 5 for 4 Marks). Below is the complete, step-by-step model answer strictly aligned with the latest Balbharati Textbook and official board marking scheme.
Board Examiner Marking Scheme (8 Marks):
1. Meaning, Origin & Legal Definition (Section 2(30)): 2 Marks
2. Explanation of Features (Any 6 to 8 valid points with sub-headings): 6 Marks
Presentation Tip: We have provided all 10 official Balbharati textbook points below. Studying at least 8 points guarantees a full 8 out of 8 score!
1. Meaning and Definition of Debentures
Meaning & Origin of the Word "Debenture"
Debentures are one of the principal sources of raising borrowed capital (debt capital) to meet long-term and medium-term financial needs of a joint-stock company. The word "Debenture" has originated from the Latin word "Debere", which means "to owe". In simple terms, a debenture is a document (certificate of loan) issued by a company under its common seal acknowledging an indebtedness (debt) of a specified sum of money and promising to repay it after a fixed period along with regular interest.
Legal Definition (Companies Act, 2013)
According to Section 2(30) of the Companies Act, 2013:
"Debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not."
Expert Definition (Palmer)
According to Palmer:
"A debenture is an instrument under seal evidencing debt, the essence of it being admission of indebtedness."
2. Quick Revision Chart: 10 Features of Debentures
Drawing this quick summary list of the 10 features before explaining them helps the board examiner award full marks immediately:
| Sr. No. | Feature Heading (Balbharati Textbook) | Key Keyword for Exam |
|---|---|---|
| 1. | Promise | Written promise to repay principal amount on maturity |
| 2. | Face Value | High denomination — usually Rs. 100/- or in multiples of Rs. 100/- |
| 3. | Time of Repayment | Repaid on a specified due date (maturity date) written on certificate |
| 4. | Priority of Repayment | Paid before equity and preference shareholders on winding up |
| 5. | Assurance of Repayment | Long-term debt carrying an assured repayment of principal |
| 6. | Interest | Fixed rate of interest payable periodically regardless of profit |
| 7. | Parties to Debentures | 3 Parties: (a) Company, (b) Trustees, and (c) Debenture Holders |
| 8. | Authority to Issue Debentures | Issued by the Board of Directors (Section 179(3)) |
| 9. | Status of Debenture Holder | Creditor of the company; no voting rights (Section 71(2)) |
| 10. | No Voting Right & Security | Secured by fixed or floating charge on assets; listed on Stock Exchange |
3. Detailed Explanation: Features of Debentures
1. Promise
A debenture is a written promise by the company that it owes a specified sum of money to the holder of the debenture. It contains an undertaking to repay the principal amount on a specified maturity date or after a fixed period.
2. Face Value
The face value (nominal value) of a debenture normally carries a high denomination. It is generally issued in denominations of Rs. 100/- or in multiples of Rs. 100/- (such as Rs. 500/- or Rs. 1,000/-).
3. Time of Repayment
Debentures are issued with the due date of repayment (maturity date) clearly stated on the face of the debenture certificate. The principal amount of debentures is repaid by the company on the maturity date.
4. Priority of Repayment
Debenture holders have a priority in the repayment of debenture capital over the other claimants (such as preference shareholders and equity shareholders) of the company at the time of liquidation or winding up.
5. Assurance of Repayment
A debenture constitutes a long-term debt. They carry an assurance of repayment on the due date because most debentures are backed by tangible security and a Debenture Redemption Reserve (DRR).
6. Interest
A fixed rate of interest is agreed upon and is paid periodically (annually, half-yearly, or quarterly) in case of debentures. Payment of interest is a fixed liability (charge against profit) of the company. It must be paid by the company irrespective of the fact whether the company makes a profit or suffers a loss.
7. Parties to Debentures
There are generally three parties involved in a debenture issue:
- (a) Company: This is the business entity that borrows the money and issues the debentures.
- (b) Trustees (Debenture Trustees): A company has to appoint Debenture Trustees if it is offering debentures to more than 500 people. This is an institution through which the company deals with the debenture holders. The company makes a legal contract with the trustees known as the "Trust Deed".
- (c) Debenture Holders: These are the investors (lenders) who provide the loan and receive the debenture certificate as evidence of participation.
8. Authority to Issue Debentures
According to the Companies Act, 2013, Section 179(3), the Board of Directors has the power to issue debentures by passing a resolution at a Board Meeting (subject to borrowing limits approved by shareholders).
9. Status of Debenture Holder
A debenture holder is a creditor of the company. Since a debenture is a loan taken by the company, interest is payable on it at a fixed rate, at a fixed interval, until the debenture is redeemed.
10. No Voting Right, Security & Listing
- No Voting Right: According to Section 71(2) of the Companies Act, 2013, no company shall issue any debentures carrying any voting rights at general meetings. Debenture holders have no right to participate in the management of the company.
- Security: Debentures are generally secured by a fixed or floating charge on the assets of the company. If the company is not in a position to make payment of interest or repayment of capital, the debenture holder can sell off the charged property of the company and recover his money.
- Listing: Debentures must be listed with at least one recognized Stock Exchange, and they can be easily transferred through the instrument of transfer.
Quick Memory Trick to Remember All 10 Points in the Exam
Memory Shortcut (Mnemonic — "PFT-PAI-PASN"):
Group the 10 textbook headings into 3 easy logical sets:
1. Certificate & Repayment (5 Points): Promise, Face Value (Rs. 100), Time of Repayment, Priority of Repayment & Assurance of Repayment
2. Return & Parties (3 Points): Fixed Interest, 3 Parties (Company, Trustees, Holders) & Authority to Issue (Board of Directors)
3. Status & Rights (2 Points): Status (Creditor) & No Voting Right / Security on Assets
Key Concept Summary for Objective Questions (Q.1)
- Latin Origin: The word Debenture comes from the Latin word "Debere", which means "to owe".
- Authority to Issue Debentures: Under Section 179(3) of the Companies Act, 2013, the power to issue debentures rests with the Board of Directors.
- Debenture Trustees Threshold: A company must appoint one or more Debenture Trustees when it invites more than 500 persons to subscribe for its debentures.
- Creditorship Security: Debentures are known as "Creditorship Securities" because debenture holders are creditors of the company.