Q.Distinguish between a debenture and a share. Why is debenture known as loan capital? Explain.

Showing the 12 most recent of 88 on this concept.

1. CBSE 2026Set 67/5/11 markMCQ
   Q.(a) Reserve capital is that portion of the ________ capital that can be called only in the event of winding up of the company. (A) called-up (B) uncalled (C) paid-up (D) subscribed

   (OR)

   (b) The debentures which do not carry a specific rate of interest are known as : (A) Irredeemable debentures (B) Bearer debentures (C) Specific coupon rate debentures (D) Zero coupon rate debentures

   ›Reveal solutionSolution

   Part (a): Reserve capital is a part of uncalled capital — option (B).

   Part (b): Debentures with no specific interest rate are Zero coupon rate debentures — option (D).

   Part (a)

   Under Section 65 of the Companies Act, 2013, a company may by special resolution decide that a portion of its uncalled share capital shall not be called except on winding up. This ring-fenced portion is Reserve Capital — extra security for creditors.

   • (A) called-up — already demanded; wrong. (B) uncalled — correct. (C) paid-up — already received; wrong. (D) subscribed — too broad.

   ✓Final answer

   Reserve capital is that portion of the uncalled capital that can be called only in the event of winding up — option (B).

   Part (b)

   • Irredeemable debentures — no fixed redemption date; still carry interest.
   • Bearer debentures — transferable by delivery; carry interest.
   • Zero coupon rate debentures — no specific interest rate; issued at a deep discount, redeemed at par.

   ✓Final answer

   Debentures that do not carry a specific rate of interest are Zero coupon rate debentures — option (D).

2. CBSE 2026Set MARCH1 mark
   Q.Who is called debenture holder?

   ›Reveal solutionSolution

   A debenture holder is a creditor (lender) of the company who owns its debentures.

   A debenture is a written acknowledgement of a debt taken by a company, usually carrying a fixed rate of interest. The person who buys/holds such debentures is called a debenture holder.

   Key points:

   • He is a creditor of the company, not a shareholder/owner.

   • He receives a fixed rate of interest whether or not the company earns profit.

   • He has the right to get his principal back on redemption.

   • He normally has no voting rights in the company's management.

   ✓Final answer

   A debenture holder is the holder of a company's debentures - a creditor of the company entitled to fixed interest and repayment of principal, but not an owner.

3. CBSE 2026Set ANNUAL1 mark
   Q.Fill in the blank: The rate of return on debentures is called __________. (Dividend/Interest)

   ›Reveal solutionSolution

   The rate of return on debentures is called interest.

   Debentures represent borrowed capital (debt) of the company, not ownership. Therefore debenture-holders are creditors who receive a fixed, pre-agreed rate of return called interest, which is a charge against profit and payable irrespective of profits. 'Dividend' is the return given to shareholders (owners), not to debenture-holders.

   ✓Final answer

   The rate of return on debentures is called Interest.

4. CBSE 2026Set ANNUAL1 mark
   Q.Write the difference between share and debenture on the basis of voting right.

   ›Reveal solutionSolution

   On the basis of voting right: shareholders have it, debenture-holders do not.

   Basis	Share	Debenture
   Nature	Ownership capital	Borrowed capital (loan)
   Voting right	An equity shareholder has the right to vote in the company's general meetings	A debenture-holder, being only a creditor, has no voting right in company affairs

   Thus the key difference is that shareholders can participate in management decisions through voting, whereas debenture-holders cannot.

   ✓Final answer

   A shareholder (owner) enjoys voting rights, whereas a debenture-holder (creditor) has no voting rights.

5. CBSE 2026Set ANNUAL1 markMCQ
   Q.Debenture holders are the

   (a) Customers of the company

   (b) Owners of the company

   (c) Creditors of the company

   (d) All of them

   ›Reveal solutionSolution

   Debenture-holders are creditors of the company - option (c).

   A debenture is part of a company's borrowed capital. The debenture-holders have lent money to the company and are therefore its creditors; they are entitled to interest at a fixed rate (whether or not the company earns a profit) and to repayment of their money, but they are not owners and have no voting rights.

   ✓Final answer

   (c) Creditors of the company.

6. CBSE 2026Set ANNUAL1 mark
   Q.Fill in the blank: Debentures represents a ________ term loan taken by the company.

   ›Reveal solutionSolution

   Answer: Long (long-term loan).

   A debenture is a written acknowledgement of a loan raised by a company, usually repayable after a long period. It forms part of the company's borrowed (long-term) capital. Hence a debenture represents a long-term loan taken by the company.

   ✓Final answer

   Long-term loan.

7. CBSE 2026Set ANNUAL1 mark
   Q.State whether True or False: Debentureholders are owners of the company.

   ›Reveal solutionSolution

   The statement is False.

   A debenture is an acknowledgement of a loan given to the company, so debentureholders are creditors who get fixed interest. The owners of the company are its shareholders. Hence the statement is false.

   ✓Final answer

   False.

8. CBSE 2026Set ANNUAL1 markMCQ
   Q.Under which major head are debentures shown on the liabilities side of the balance sheet of a company?

   (a) Current Liabilities

   (b) Non-current Liabilities

   (c) Share Capital

   (d) Reserves and Surplus

   (a) Current Liabilities

   (b) Non-current Liabilities

   (c) Share Capital

   (d) Reserves and Surplus

   ›Reveal solutionSolution

   Debentures are shown under the Non-current Liabilities major head.

   Under Schedule III, Part I of the Companies Act, 2013, the Equity and Liabilities side of a company's balance sheet is grouped under three major heads:

   1. Shareholders' Funds
   2. Non-current Liabilities — includes Long-term Borrowings (debentures, term loans, etc.), Deferred Tax Liabilities, Long-term Provisions
   3. Current Liabilities — includes Short-term borrowings, Trade payables, Other current liabilities, Short-term provisions

   Debentures are a form of long-term borrowed capital — the company borrows from the public/investors and promises to repay after a specified (usually long) period, paying a fixed rate of interest in the meantime. Because the obligation to repay the principal amount normally falls due after more than 12 months from the balance sheet date, debentures are classified as Long-term Borrowings, which is a sub-head under the Non-current Liabilities major head.

   (If any part of a debenture is due for redemption within the next 12 months, that specific portion is reclassified under Current Liabilities — "Current maturities of long-term debt" — but the debenture balance as a whole is reported under Non-current Liabilities.)

   ✓Final answer

   Debentures are shown on the liabilities side under the Non-current Liabilities major head.

9. CBSE 2026Set ANNUAL1 markMCQ
   Q.What does company pay to debentureholders as return on debentures?

   (a) Interest

   (b) Dividend

   (c) Salary

   (d) Goodwill

   (a) Interest

   (b) Dividend

   (c) Salary

   (d) Goodwill

   ›Reveal solutionSolution

   A company pays Interest to debenture holders as the return on their debentures.

   Debentures represent borrowed/loan capital of a company; a debenture holder is a creditor of the company, not a member/owner. In return for lending money to the company, a debenture holder is entitled to receive a FIXED rate of return mentioned on the debenture certificate (e.g. 9% Debentures, 12% Debentures), called Interest.

   Key distinguishing features of interest on debentures:

   • It is a CHARGE against profit — the company is legally bound to pay it whether it earns a profit or incurs a loss.
   • It is paid at a fixed, predetermined rate.
   • It is a business expense, debited to the Statement of Profit and Loss, and reduces the company's taxable profit.

   This is different from Dividend, which is an APPROPRIATION of profit (paid only if profit is available and the Board/shareholders decide to distribute it), and from Salary or Goodwill, which are not returns on debenture investment at all.

   ✓Final answer

   The company pays Interest to debenture holders as the return on their debentures.

10. CBSE 2026Set ANNUAL1 mark
    Q.Which type of debentures can not be converted into shares?

    ›Reveal solutionSolution

    Non-Convertible Debentures cannot be converted into shares.

    On the basis of convertibility, debentures are classified into two types:

    1. Convertible Debentures — these carry an option/right for the holder to convert them (fully or partly) into equity shares (or sometimes preference shares) of the company, after a specified period and on specified terms.
    2. Non-Convertible Debentures (NCDs) — these carry NO such right of conversion. The holder of a non-convertible debenture continues to remain a creditor of the company throughout the tenure of the debenture, and on maturity, the company simply repays him in cash (redemption), rather than issuing him shares.

    Since the question asks which type CANNOT be converted into shares, the answer is the type that is specifically designed with no conversion feature.

    ✓Final answer

    Non-Convertible Debentures cannot be converted into shares.

11. CBSE 2026Set ANNUAL1 markMCQ
    Q.Interest on Debentures is a charge against

    (a) Share Capital

    (b) General Reserve

    (c) Dividend

    (d) Profit

    ›Reveal solutionSolution

    Interest on Debentures is a mandatory contractual expense (a "charge"), deducted while computing profit itself — it is payable even if the company makes a loss, unlike dividend.

    Debentures represent borrowed funds — debenture holders are creditors of the company, not its owners/members. The company is therefore legally and contractually bound to pay interest on debentures at the stated rate, regardless of whether the company earns a profit or incurs a loss in a given year. This makes it a charge against profit — an expense debited to the Statement of Profit & Loss before arriving at the figure of net profit — exactly like rent, salaries, or depreciation.

    This is fundamentally different from:

    • Dividend, which is a mere appropriation of profit — it can be paid only if the company has earned a profit, and the Board/shareholders can choose not to declare it even when profits exist.
    • Share Capital and General Reserve, which are not expenses at all — they are items on the liabilities/equity side of the Balance Sheet.

    So among the given options, only "Profit" correctly completes the statement — interest on debentures is deducted in arriving at profit, it is not paid out of an existing profit balance like a dividend would be.

    ✓Final answer

    Option (d) "Profit" — interest on debentures is a charge against profit (a mandatory expense), payable whether or not the company earns a profit.

12. CBSE 2026Set ANNUAL1 markMCQ
    Q.Debentures which do not carry any specific rate of interest are known as

    (a) registered debentures

    (b) zero-coupon rate debentures

    (c) bearer debentures

    (d) secured debentures

    ›Reveal solutionSolution

    A "zero-coupon" debenture carries no stated interest rate at all — the investor's entire return comes from the gap between its (discounted) issue price and its redemption value.

    Debentures can be classified on several bases, and "rate of interest" is one of them:

    • Specific Coupon Rate Debentures — carry a fixed, stated rate of interest (e.g., "9% Debentures"), paid periodically to the debenture holder.
    • Zero-Coupon Rate Debentures — carry no stated/specific rate of interest at all. They are typically issued at a substantial discount to their face value and are redeemed at face value (or a value close to it); the difference between the issue price and the redemption value itself constitutes the investor's effective return, functioning like implicit interest.

    This is a different classification axis from:

    • Registered vs. Bearer Debentures (based on whether the company maintains a record of the holder's name),
    • Secured vs. Unsecured Debentures (based on whether a charge is created on company assets).

    Neither of those relates to the rate of interest — only "zero-coupon rate debentures" directly answers "no specific rate of interest."

    ✓Final answer

    Option (b) "zero-coupon rate debentures" — these carry no stated interest rate; the investor earns a return only through the discount-to-redemption-value gap.