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ATUL QAZI
Context
Introduction to Debentures Types of Debentures Merits & Demerits Difference between Debenture & Share SEBI Guidelines Conclusion
Introduction to Debentures
A debenture is defined as a certificate of agreement of
loans which is given under the company's stamp and carries an undertaking that the debenture holder will get a fixed return (fixed on the basis of interest rates) and the principal amount whenever the debenture matures.
Characteristics
Debenture Holder are the creditors of the company.
maturity. When offered for subscription a debenture redemption reserve has to be maintained. If listed on the stock exchanges, they should be rated prior to the listing by any of the credit rating agencies designated by SEBI.
Types of Debentures
A. SECURITY :
Secured & unsecured B. CONVERTIBILITY: Fully Convertible & Non convertible C. TENURE : Redeemable & Non-Redeemable D. RECORDS: Registered & Bearer
Merits
No dilution of control Long term finance Tax Benefit Investors safety
Demerits
Fixed obligation
Charge on assets
No voting Rights
Differentiation
Debentures Creditors of the company Shares Owners of the company
Have no voting rights and no consequent Have voting rights and consequent control of the company control of the company Interest is paid at a predetermined fixed rate On basis of Security, tenure, Convertibility, Records. Can be converted into shares On liquidation they are paid first Dividend on equity is paid at variable rate depending on profits Equity shares and preference shares Can not be converted into debentures On liquidation paid after paying debentures and creditors
will not be permissible, unless conversion is made optional with put and call option. Compulsory credit rating will be required if conversion is made for FCDs after 18 months. Premium amount on conversion, the conversion period, in stages, if any, shall be pre-determined and stated in the prospectus. The interest rate for above debentures will be freely determinable by the issuer. Issue of debenture with maturity of 18 months or less are exempt from the requirement of appointing Debenture Trustees or creating a Debenture Redemption Reserve (DRR).
in the prospectus and DRR will be created in accordance with guidelines laid down by SEBI. The trust deed shall be executed within six months of the closure of the issue. Any conversion in part or whole of the debenture will be optional at the hands of the debenture holder, if the conversion takes place at or after 18 months from the date of allotment, but before 36 months. Premium amount at the time of conversion for the PCD, redemption amount, period of maturity, yield on redemption for the PCDs/NCDs shall be indicated in the prospectus.
Conclusion
SEBI has laid down guidelines for debentures issued by
the company in order to trade in the debt market. This helps investors to study the true and fair view to invest in the debt market.