Abdulla 1

Zeeshan Abdulla
Professor Syed Qammar Sabzwari
Corporate Law LAW-405
2 May 2014
Assignment no. 2
QUESTION: Explain the general features of Debentures and write down differences among the
shares and debentures?

Debenture means a document issued by the company as an acknowledgement of indebtedness to
its debenture-holders and giving an undertaking to repay the debt at a specified date or at the
option of the company. These are the instruments for raising long-term debt capital. Debenture
holders are the creditors of the company to which company pays the interest at a fixed rate and at
the intervals stated in the debenture. No voting rights have given to the debenture holders.
Usually debentures are secure by charge on the assets of the company.

General features of debenture
Following are the features of debenture:
1) Debenture holders of the company are the creditors of the company and not the owners of the
company.
2) Capital raised by way of debentures is required to be repaid during the lifetime of the
company at the time stipulated by the company. Thus, it is not a source of permanent capital.
3) Debentures are generally secure; by a charge, fixed or floating on any part of the companys
property or undertaking. However, this is not an essential condition because Companies
Abdulla 2

Ordinance 1984 says that the debentures may or may not constitute a charge on the assets of the
company.
4) Return paid by the company is in the form of interest, which is predetermined.
5) Debentures are very risky from companys point of view for raising long-term funds.
6) Risk on the part of debenture holders is very less.
7) Debenture holders do not carry any voting rights.
8) Debentures are a cheap source of funds from the companys point of view.
9) It is one of a series of like debentures. However, a single debenture can be issued to one man.

Difference between Shares and Debentures.
1. Shareholder, person owing the shares, is the real owner of the company. Shares has not fixed
dividend rate. Shares have not maturity period. Share is not redeemed. Shares are more volatile.
Shares have high risk. Shares gave you high return. Shareholders have right on residual income.
2. Debentures are the credits of a company. They have fixed rate of interest. They have a
maturity period. They do not have right to vote. Debentures are redeemed. They are not volatile.
They have no risk. They have low return.