KENDRIYA VIDYALAYA BARKUHI

DEBENTURE
2022-2023

Under Supervision of By
Mrs.Deepika Yadav Tanisha
(Accounts) Mahalgavaiya

12th commerce
 CERTIFICATE
This is to certify that Tanisha
Mahalgavaiya studying in class 12
Kendriya Vidyalaya Barkuhi has
successfully completed his/her
project work of Accounts entitled
Debenture under guidance of Mrs.
Deepika Yadav (Accounts) in the partial
fulfillment of practical examination of the
Central Board of Secondary Education
conducted by K.V. BARKUHI (WCL) in the
year 2022-2023. It is further certified that
this project is the individual work of the
candidate.

Place: k v barkuhi
Date:2/1/2023

External Examiner Internal Examiner

Principal
 ACKNOWLEDGEMENT

I WOULD LIKE TO EXPRESS MY SPECIAL

THANKS OF GRATITUDE TO MY ACCOUNTS
TEACHER “Mrs.Deepika Yadav” FOR HIS
VALUABLE GUIDANCE AND SUPPORT IN
COMPLETING MY PROJECT.

I WOULD ALSO EXTEND MY GRATITUDE TO

THE PRINCIPAL “Mr. SANWAR MAL” FOR
PROVIDING ME WITH ALL THE FACILITY
THAT WAS REQUIRED.

DATE: 2/1/2023 SIGNATURE OF THE STUDENT:

NAME OF THE STUDENT: Tanisha
Mahalgavaiya
BOARD ROLL NO.:
CLASS:12-C
 TABLE OF CONTENTS

Abstract.............................................................5

Introduction.......................................................4

Debenture: Meaning and Characteristics……..6

Classification of Debentures.............................8

Advantages and Disadvantages.....................11

Issue in private companies.............................24

Debentures and Debt Market:IndianContext..27

Conclusion.....................................................30
 Abstract
“Any informed borrower is simply less vulnerable to fraud and abuse”
-Alan Greenspan

Being a qualified Company Secretary, it was an interesting task to

take up topics from the corporate world. Having worked under various
circumstances, one thing was clear that a project shall be based on
some real time experiences that author has faced during her
professional tenure. The concept of debenture struck in mind of the
author because she has seen that there is a lack of organized debt
market in India and also, during her work experience, she has faced
some challenges in legal compliance in issuing and listing of long term
debt instruments: Debentures.

Introduction
Finance is the lifeblood of every business. It is perhaps the most
crucial factor in deciding fate of any business enterprise. Finance is
required in day-to-day transactions of business as well as for carrying
out capital (long term) investments of the business. Keeping this in
view, it is the most important function of a financial manager that is to
arrange funds for the business from different sources. This becomes
necessary under the fact that pre determined goals of business could
only be achieved when a business does not suffer from lack of
finance. It is evident in daily lives too that a person cannot carry on his
daily tasks without having financial support. Other than this, just like
daily lives, a business cannot run smoothly in absence of finance.This
therefore is the most crucial decision that a financial manager needs
to take up- composition of capital structure of an organization.
Following diagram shows capital structure and its various
components:
Let us get a brief introduction of each of components of
capital structures:
Equity Capital
Shareholder’s equity (or stockholders' equity, shareholder’s
funds,shareholder’s capital employed) is the interest in
remaining assets, spread among individual shareholders of
common or preferred stock. At the start of a business, owners
put some funding into the business to finance assets.
Businesses can be considered to be, for accounting
purposes,sums of liabilities and assets; this is the accounting
equation. After liabilities have been accounted for, the
positive remainder is deemed the owner's interest in the
business.
 Preference Capital
Preferred stock, also called preferred shares or preference
shares, is typically a 'higher ranking' stock than voting
shares, and its terms are negotiated between the corporation
and the investor. Preferred stock usually carries no voting
rights, but may carry superior priority over common stock in
the payment of dividends and upon liquidation. Preferred
stock may carry a dividend that is paid out prior to any
dividends being paid to common stock holders. Preferred
stock may have a convertibility feature into common stock.
Preferred stockholders will be paid out in assets before
common stockholders and after debt holders in bankruptcy.
Terms of the preferred stock are stated in a "Certificate of
Designation".

Debt Capital
Debt capital is the capital that a business raises by taking out a
loan. It is a loan made to a company that is normally repaid at
some future date. Debt capital differs from equity or share
capital because subscribers to debt capital do not become part
owners of the business, but are merely creditors, and the
suppliers of debt capital usually receive a contractually fixed
annual percentage return on their loan, and this is known as the
coupon rate. Debt capital ranks higher than equity capital for the
repayment of annual returns. This means that legally, the interest
on debt capital must be repaid in full before any dividends are
paid to any suppliers of equity.
 Main part of Analysis

Our analysis will be based on long-term sources of funds:

most specifically debt finds. In India,it is important to
understand that, there is no bond market. Companies and
government most often come up with issue of a long-term
debt instrument known as debenture. Let us move forward
and understand meaning of term debenture, especially in
context of Indian financial markets.

Debentures Meaning and Nomenclature

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.In finance, a debenture is a
long-term debt instrument used by governments and large
companies to obtain funds. It is defined as "a debt secured only
by the debtor’s earning power, not by a lien on any specific
asset." It is similar to a bond except the security conditions are
different. A debenture is usually unsecured in the sense that
there are no liens or pledges on specific assets. It is, however,
secured by all properties not otherwise pledged. In the case of
bankruptcy, debenture holders are considered general creditors.
The advantage of debentures to the issuer is they leave specific
assets burden free, and thereby leave them open for subsequent
financing.Debentures are generally freely transferable by the
debenture holder. Debenture holders have no voting rights and
the interest given to them is a charge against profit.
Definition of Debentures by Indian Companies Act,
1956:The term debenture includes debenture stocks, bonds
and any other security of a company,whether constituting a
charge on the assets of a company or not.

Features of Debentures as a long-term financial

(Debt) instrument
Following are the basic features of debentures that differentiate them
from other sources of finance. After understanding meaning of different
capital structures, we need to understand peculiar characteristics of
debentures that make them different from commonly used finance
sources:

•Investors who invest in the debentures of the company are not the owners of
the company. They are the creditors of the company or in other words, the
company borrows the money from them.

•Funds raised by the company by way of debentures are required to be repaid

during the life time of the company at the time stipulated by the company. As
such, debenture is not a source of permanent capital. It can be considered as a
long-term source.

•In practical circumstances, debentures are generally secured i.e. the

company offers some of the assets as security to the investors in debentures.

•Return paid by the company is in the form of interest. Rate of interest is

predetermined,but the company can freely decide the same. The interest on
debenture is payable even if the company does not earn the profits

•In financial terms, debentures prove to be a cheap source of funds from the
company’s point of view
So this thing needs to be kept in mind by a company that an
investor is expected to invest in debentures only when liquidity
and financial position of company is very sound. An investor is
always careful before investing in any company, especially in
debt instruments where there is hardly any chance of capital
appreciation. So, a company that is very much sure about it
financial well-being could very well come up with issue of
debentures. Debentures are also ideal for companies, which do
not want any kind of dilution in control of management. That
means,organizations, which do not want to issue shares, could
come up with issue of debentures.Apart from that, financial
manager must make sure that company is in sound enough
position to make periodic interest payments and also, repayment
of principal amount at the right time.

Classification of debentures
In India, debentures could be classified in basically two
categories: on the basis of security and on the basis of
convertibility. Following diagram shows details of
classification of debentures in Indian context:
Let us now discuss each of the types of debentures, which are issues in
market by companies to raise funds.

On the basis of convertibility:

• Fully convertible Debentures (FCD):These are fully convertible into Equity shares at the
issuer's notice. The issuer decides the ratio of conversion. Upon conversion the investors enjoy
the same status as ordinary shareholders of the company.

• Partly Convertible Debentures (PCD):A part of these instruments are converted into Equity
shares in the future at notice of the issuer. The issuer decides the ratio for conversion. This is
normally decided at the time of subscription.

• Non-Convertible Debentures (NCD):These instruments retain the debt character and cannot
be converted in to equity shares.

• Optionally Convertible Debentures (OCD):The investor has the option to either convert
these debentures into shares at price decided by the issuer/agreed upon at the time of issue.
On the basis of security:
• Secured Debentures:These instruments are secured by a charge
on the fixed assets of the issuer company. So if the issuer fails on
payment of either the principal or interest amount, his assets can be
sold to repay the liability to the investors.

• Unsecured Debentures:These instruments are unsecured in the

sense that if the issuer defaults on payment of the interest or
principal amount, the investor has to be along with other unsecured
creditors of the company.

Along the dimension of security, we have seen that debentures have

been classified into unsecured (Straight) and secured (mortgage)
debentures. Unsecured debentures do not carry any charge on
specific assets of the company while secured debentures carry a
fixed or floating charges on assets of company.

The distinction between secured and unsecured debentures becomes

relevant in case the issuer defaults in payment of interest and
principal amount so taken from investors. Secured debenture holders
are entitled to take possession of security given to them and realize
their dues by selling these assets, which are most commonly- land,
buildings, plant, machinery of business. This right is valuable to
debenture holders provided security is valuable, easily saleable and
has not been simultaneously given as security to other creditors as
well. All these factors have to be examined while evaluating
debenture. Unsecured debenture are not backed by any such
security, but an investor needs not worry about that if he has a belief
that company is doing financially and chances of default are very
bleak.
 Advantages of Debentures
Continuing the classification of debentures, next step to be
undertaken during course of our analysis is to look at fact as
to how debentures have an advantage over other sources of
long-term finance. In this section of our study, we shall look
as to what are the pros and cons of debentures that make it
one of the most reliable sources of long-term finance and
also create a huge scope in Indian financial markets.

Following are advantages of debentures that make them a

reliable source of finance as compared to other long-term
finance sources:

Let us divide our analysis into three major points i.e.,division

of advantages of debentures by different prospective:

Let us now take a look at the description of above-mentioned topics in

brief. During course of description, efforts will be made to make sure
that a reader understands relative advantage of debentures and
conclusions could be drawn out as to how under utilized this very source
of finance has been in Indian context:
General Advantages:
These advantages are highly dependable on the success rate of
the current interest rate and economic situation of society.
• Greater Returns on Corporate Debentures:Corporate bonds and
debentures are usually much more rewarding than government debentures or bank
investments and provide a higher rate of financial return for their investors. If a
company is selling debentures to people, it means that they definitely need the
money and are willing to pay you quite a bit of additional money to use it. The fact
of receiving a greater return on corporate debentures is a great advantage to these
types of investment.

• Financially Convertible:Another great advantage to debentures is that at

the end of the lending period companies usually offer the assets in the form of
stock, which can ultimately be very valuable. Stocks are another great form of
investment and are sometimes better than receiving immediate cash in return.
Although the advantages of debentures can be clearly seen, there are a number
risks and disadvantages to investing in corporate debentures.

• Success or Failure:You are taking a great risk when investing in a corporate

debenture because the success of the company will determine how valuable your
debenture is. A company debenture is only valuable when the company is
successful and profitable, but if it fails, then you will lose a great amount of money.
Debentures and bonds hold greater risks because the company could eventually go
out of business, so this type of investment should be done very carefully.

Debentures can be a very attractive form of investment, but only should be

taken advantage of with companies that have a very high probability of being
successful. Large and already successful businesses are smart forms of
investments when considering buying corporate debentures.
Advantages to investors:
● They have the possibility to acquire shares at a lower price to that of
the market- by way of investment in convertible debentures with
embedded options of conversion into equity shares.
● They have the right for subscription of shares at a lower price to that of
the market.
● They are less exposed to the risks of inflation.
● The price of conversion is always lower to that of the market so the
effects of a possible inflation are mitigated. This inflation effects causes
a rise on the stocks quotations.
● Investors get better returns as compared to bank deposits.
● Debentures are less volatile as compared to equity shares.
● At times, companies come up with offers like principal guarantee.
● Due to SEBI guidelines, chances of default by corporate are very less.

Advantages to issuing institutions:

● There is an improvement in the financial structure of the company,
because the extra resources (debentures) are transformed into own
resources (shares). It transforms debt into capital.
● The financial cost is lessening, because if the investor chooses for the
conversion they don’t have to obey the requisites from the debentures:
to pay interests and to refund the capital. On the other side, the interests
from the debentures or bonds are usually lower than that on the market,
this way, in case of not converting, the company will finance itself with
cheap debt.
● The sooner the conversion is made, the greater are the discounts, so the
lesser are the numbers of shares that you can obtain with each
debenture.

After talking about advantages of debentures, lets take a look on various

demerits this source of finance suffers from. No doubt that there are few
cons from which debentures suffer, but these demerits are small enough
to overlook and advantages always override the disadvantages:
General Disadvantages:
● By issuing the debentures, the company accepts the risk of two
types.These are payment of the interest at a fixed rate, irrespective of
the non-availability of profits and repayment of principal amount at the
pre-decided time. If earnings of the company are not stable or if the
demand for the products of the company is highly elastic, debentures
prove to be a very risky proposition for the company. Any adverse
change in the earnings or demand may prove to be fatal for the
company.
● Debentures are usually a secured source for raising the long-term
requirement of funds and usually the security offered to the investors is
the fixed assets of the company. A company, which requires less
investment in fixed assets, such as a trading company, may find
debentures as a wrong source for raising the long-term requirement of
funds, as it does not have sufficient fixed assets to offer as security.

Disadvantages for the Investor

● They don’t pass immediately through the quotations.
● The securities have a less quotation price due that temporarily they
have lesser rights.
● They are less liquid, due that there is a lesser amount of them.
● You can’t dispose of money soon due to the former explanation.
Usually the type of interests that they offer is inferior to that of the
ordinary debentures due that they offer the additional advantage of
placing them as shares on the market.
 Disadvantages for the Issuing Institution
● You can’t foresee an exact dividend distribution politic due that existing amounts of
shares will depend on the number of debentures that will exercise their option of
conversion.
● There are doubts when you can’t calculate the interests of the debentures. Again, the
number of securities to be converted is unknown or unknown of the amount of funds to
be returned with the amortizations.

Debentures and Debt market in Indian context:

After understanding in brief some of legal compliances related with issue of debentures in public
as well as private companies, we should conclude our analysis by taking a look at current
economic conditions and implications of debentures in Indian financial structure.It is very
discouraging to see that debt market in India is not as organized as in other advanced economies.
Taking example of the US, where debt market (bonds) has a size, which is more that thrice the
size of equity markets. In India, companies have been issuing debentures to public as well as to
financial institutions, but the level of issue has not been as large as equity issue. Also there is no
organization in Indian secondary debt markets as compared to organized equity markets. In
India, public at large averse themselves from investing in debentures issued by large corporate
houses. In most cases, it is financial institutions, which invest in debentures of corporate bodies.
Public at large is interested in investing in debentures which are issued by financial institutions.
In Indian markets there are about 8000 companies, which come up with issues of securities. Out
of them, only about 2000 are traded on stock exchanges on a regular basis. Most often, there is a
lack of liquidity in Indian stock markets that lead to a disinterest by investors in debt
instruments. This difference in Indian scenario with that of advanced economy (USA) will
become more clear by way of following case analysis.

In this case illustration, we will take two companies from each nation: Reliance Industries
Limited from India and Wal-Mart Inc. from the USA. We will see that both the companies have
significant effect on their respective economies and in a way they reflect the financial structure
and pattern followed by investors in that nation. We will take into account the respective
contribution of debt- bonds and debentures in total capital as well as total liabilities of these
companies. After this analysis, we will be in a position to draw conclusions of illustration as well
as make our recommendations on project and debentures’ scenario in the Indian market.
 Reliance Industries Limited: India
Shareholder’s Funds:Rs. 81,448.60 crores
Debentures:Rs. 4118.12 Crores

(Reliance Industries Limited: Sources of Long Term Finance)

This very illustration shows that debentures and bonds have not been
able to win the confidence of investors in the context of the Indian
Financial Market.

Conclusion of Analysis
It is not just about a single company, the whole debt market of India
needs reorganization and that too at a rapid rate. In today’s context
when due to recession, equity markets have fallen drastically in India,
debentures could just help in saving days for all troubled financial
markets of India. Apart from that, the government should take account
of SEBI’s advice when the authority has constantly urged them to work
for the organization of the debt market in India. This is necessary
because in an emerging economy, it is important that there is an active
participation of the public in corporate world activities. Role of a
Company Secretary is important because in this condition he’s the one
who has to maintain equilibrium between the interests of investors,
company and government of India. This is perhaps real challenge that a
Company Secretary will have to face in some years to come.