5 Features of Debenture or bond
Unlike shares of stock, debenture or bond is a creditorship security with a fixed rate of interest, fixed maturity period, perfect income certainity and low risk of capital. The salient characteristics of debentures are as below.
(1) Maturity : Although debentures provide long term funds to a company, they mature after a specific period. Generally, the debentures are to be repaid at a definite time as stipulated in the issue. The company must pay back the principal amount on this debentures on the given date otherwise the debenture holders may force winding up of the company as creditors. However, a company may issue irredeemable or perpetual bonds or debentures which have no maturity date. The effect of issueing irredeemable debentures is that they do not have any Fixed time limit within which the company must pay back the principal amount of debentures and hence the holders cannot compel the company to pay them. But, in does not mean that the company can never redeem these debentures. In that sense, all debentures are redeemable or mature at one time or the other. The various methods for redemption of debentures have been discussed separately under the heading of extinction of bonded indebtedness in this very chapter.
(2) Claims on Income: A fixed rate of interest is payable on debentures. Unlike shares, a company has a legal obligation to pay the interest on due dates irrespective of its level of earnings. Even if a company makes no earnings or incurs loss, it is under an obligation to pay interest to its debenture holders. The default in payment of interest may cause winding up of company because the debenture holders may take resource to law for the same. in any case, bondholders have priority of claim on income of the company over equity and preference shareholders.
(3) Claims on Assets: Even in respect of claim on assets, debenture holders have priority of claim on Assets of the company. They have to be paid first before making any payment to the preference for equity shareholders in the event of liquidation of the company. However, they have may claim for the principal amount and the interest due only and do not have any share in the surplus Assets of the company, if any. Further, debentures may provide for a charge on the Assets of the company as a security to its holders. The debenture holders may have either specific charge on the Assets of the company or a floating charge over all the Assets of the company. The secured debentures and entitle its holders to have a Priority over other unsecured creditors of the company, against the assets mortgaged to them. If the assets pledged to them are not sufficient to satisfy their claims, they rank Paripassu with other unsecured creditors for the balance.
(4) Control : Since, debenture holders are creditors of the company and not its owners, they do not have any control over the management of the company. They do not have any voting rights to elect the directors of the company or on any other matters. But at the time of liquidation of the company they have prior claim over shareholders and if remain unpaid, they may take control over the company.
(5) Call Feature : Issue of debentures sometimes provides a call feature which entitles the company to redeem its debentures at a certain price before the maturity date. since, the call feature provides advantages to the company at the expense of its debenture holders, the call price is usually more than the issue price.