A company raises its capital from share and borrowings (debentures). In this blog we will discuss about the issue of capital by debentures. Loan capital of a company refers to the long-term borrowings of which issue of debentures is the most important and common method adopted by the companies.
Applications for debentures are invited from the public through the prospectus and the applicants. The company may ask for payment of the whole of the amount along with the applications. The company may ask for payment of the whole of the amount along with the application or by installment.
Debentures may be issued by a company
- For cash
- For consideration other than cash and
- As collateral security
For cash, debentures is issued either at par or at a premium or at a discount
- Issue of Debentures at Par: When debentures are issued at the nominal or face value then it is called as the issue of debentures at par e.g. issue of Rs. 1,000 debenture for Rs. 1,000.
- Issue of Debentures at Premium: When debentures are issued at a price higher than the nominal value, they are said to issue at a premium. The excess of issue price over the nominal value is the amount of premium.
- Issue of Debentures at Discount: When the debentures are issued at a price lower than the nominal value, they are said to be issued at discount. The difference between the nominal value and the issue price is regarded as the discount.
Interest on Debentures
A company issues debentures it undertakes to pay interest thereon at a fixed percentage. Interest payable on debentures is a charge against the profit of the company. Interest on debenture is normally payable half-yearly and it is calculated at the fixed percentage on the nominal value of debentures issued and not on the issue price.
Redemption of Debentures
Redemption of debentures refers to the discharge of the liability in respect of the debentures issued by a company. Debentures can be redeemed at any time either at par or at a premium or at a discount without any legal formalities to be complied with. But irredeemable debentures cannot be redeemed except on the happening of a contingency.