Issue of Debentures

Lesson

Part 1 — what debentures are, how they differ from shares, their types, and how to record their issue for cash at par, premium or discount and with terms of redemption.

In this lesson you will

Explain what a debenture is and distinguish debentures from shares
Classify debentures on the basis of security, tenure, convertibility, record and coupon rate
Pass journal entries for the issue of debentures at par, at a premium and at a discount, including the terms of redemption

Part 1 at a glance

Concept

What is a debenture?

A debenture is a written acknowledgement of a debt by a company, with a fixed rate of interest and terms of repayment.
The Companies Act 2013 (Section 2(30)) includes debenture stock, bonds and similar instruments evidencing a debt.
Debentureholders are creditors, not owners.

A debenture is borrowed capital

Compare

Debentures and shares

Shares

Owners' capital.
Dividend from profits.
Voting rights.

Debentures

Borrowed capital.
Fixed interest, even in a loss.
No voting rights.

Table comparing shares and debentures: shareholders are owners who receive a varying dividend, have voting rights and are repaid last; debentureholders are creditors who receive fixed interest even in a loss year, have no voting rights, are usually secured and are repaid first; shares cannot be issued at a discount but debentures can
Basis	Shares	Debentures
Holder is	An owner (member)	A creditor (lender)
Return	Dividend: appropriation of profit, may vary	Interest at a fixed rate: a charge against profit
In a year of loss	No dividend need be paid	Interest is still payable
Voting rights	Yes (equity shares)	None (Section 71)
Issue at a discount	Not allowed (Section 53), sweat equity apart	Allowed
Security	Never secured	Usually secured by a charge on assets
On winding up	Repaid last	Repaid before shareholders

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