4. Difference between Debentures and Shares and
explain the methods of redemption of debentures,
Answers
Difference :- share holder is the owner of the company. Debentures holder is the giver of loan to the company.
Share holder gets divident of the company. Debentures holder gets interest of the loan money.
Explanation:
ownership: A share represents ownership of the company whereas a debenture is only acknowledgement of Debt . A share is a part of the owned capital whereas a debenture is a part of borrowed capital
Return: the return on shares is known as dividend while the return on Debentures is called interest. the rate of return on shares may vary from year to year depending upon the profit of the company but the rate of interest on Debentures is prefixed. the payment of dividend is an appropriation of profits, whereas the payment of interest is a charge on profits and is to be paid even if there is no profit.
Repayment: normally, the amount of shares is not returned during the life of the company, whereas, generally, the Debentures are issued for a specified period and repayable on the expiry of that period. however, in the year 1998, the amendements ( section 77A and 77 B sub section 2) in the companies act, 1956 permitted companies to buy back it's shares specially when market value of shares are less than its book value
voting Rights: shareholders enjoy voting Rights whereas debenture holders do not normally enjoy any voting right
rate of Discount on issue: Both shares and Debentures can be issued at a discount. however, shares can be issued at discount in accordance with the provisions of section 76 of the companies act, 1956 which stipulates that the rate of Discount must not exceed 10% of the face values while Debentures can be issued at any rate of Discount
security: shares are not secured by any charge whereas the Debentures are generally secured and carry a fixed or floating charge over the assets of the company
convertibility: shares cannot be converted into Debentures whereas Debentures can be converted into shares if the teams of issue so provide, and in that case there are known as convertible Debentures
method of redemption of Debentures
there are four ways by which the Debentures can be redeemed.
- payment in lump sum
- payment in instalments
- purchase in the open market
- By conversion into shares or new Debentures
payment is lump sum: the company redeems the Debentures by paying the amount in lump sum to the Debenture holders at the maturity thereof as per terms of issue
payment in instalments: under this method normally redemption of Debentures is made in instalments on the specified date during the tenure of the Debentures. the total amount of Debenture liability is divided by the number of years. it is to note that the actual Debentures redeemable are identified by means of drawing the requisite number of lots out of the Debentures outstanding for payment
purchase in open market: when a company purchase its own Debentures for the purpose of cancellation such an act of purchasing and cancelling the Debentures constitutes redemption of Debentures by purchase in the open market
conversion into shares or new Debentures: a company can redeem its Debentures by converting them into shares or new class of Debentures. it Debenture holders find that the offer is beneficial to them they can exercise their right of converting their Debentures into shares or new class of Debentures there new shares or Debentures can be issued at par at a discount or at a premium it should be noted that only the actual proceeds of Debentures are to be taken into account for ascertaining the number of shares to be issued in lieu of the Debentures to be converted. If Debentures were originally issued at discount the actual amount realised from them at the time of issue would be used as the basis for computing the actual number of shares to be issued it may be noted that this method is applicable only to convertible Debentures
redemption by payment in lump sum the entire are
- If Debentures are to be redeemed at par
(a) Debentures a/c Dr
to Debenture holders
(b) Debenture holders a/c Dr
to Bank a/c
2. if Debentures are to be redeemed at premium
(a) Debentures a/c Dr
premium on redemption of Debentures a/c Dr
to Debenture holders
(b) Debenture holders a/c Dr
to Bank a/c