The total capitals of joint stock companies are often divided into owner’s capital and borrowed capital.
Share capital is owner’s capital whereas debenture is considered as fixed cost borrowed capital.
Debenture is a long-term loan.
Companies can raise additional capital by issuing debentures.
Debenture holders receive fixed income as interest during the loan period.
They do not have the voting right.
Debentures are written promise for a debt.
Company issues debentures under its seal which contains the terms and conditions regarding the amount of loan or principal, the rate of interest, maturity date, maturity value etc.
In other words, debenture is a certification of acknowledgment issued with the seal of company in favour of lender as an evidence of debt.
This document grants the holder the right to receive interest and return of principal as per the terms under which debentures are issued.
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A limited company collects beginning capital from equity shares capital.
The company may require additional money for its expansion and development.
For this purpose, the company can borrow from public.
Debentures are one of way to take medium term or long-term loan from public.
The capital and loan ratio should be in 3:2 i.e. capital 60% and long-term loan 40%.
Debentures are also known bonds and debt but there are slightly differences.
The owner of debentures is called debenture holders.
Debentures have fixed interest rate and maturity period.
Normally, interest is payable annually or sometime half yearly.
Debenture holders have priority to receive interest and refund money before equity shareholder at the time dissolution of firm.
The company returns amount of debenture to the holders at the end of predetermined maturity period.
“Debentures are a debt or loan raised by a company under the seal of the company.”
According to Company Act, “A trustee is necessary to raise or issue debentures or debt capital.”
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