Debentures

Debentures: meaning
types
advantages
disadvantages

1. DEB EN T URES “An honest man’s word is as good as his debenture bond”- Miguel

2. Debentures are an important instrument for raising long term debt capital. The debenture issued by an company is an acknowledgement that the company has borrowed a certain amount of money, which it promises to repay at a future date. Debenture holders are therefore termed as “ Creditors ” of the company.

3. On the basis of security:- Secured Debentures. Unsecured Debentures. Secured Debentures are such which create a charge on the assets of the company, thereby mortgaging the assets of the company. Unsecured Debentures do not carry any charge on the assets of the company.

4. On the basis of redemption:- Redeemable Debentures. Non-redeemable Debentures. These are the debentures which are issued for a fixed period. It can be redeemed by annual drawings or by purchasing from the open market. These are the debentures which are not redeemed in the life time of the company. Such debentures are paid back only when the company goes to liquidation.

5. On the basis of records:- Registered Debentures. Bearer Debentures. Registered debentures are those which are duly recorded in the register of debenture holders maintained by the company. The debentures which are transferable by mere delivery are called bearer debentures.

6. On the basis of Convertibility:- Convertible Debentures. Non-Convertible Debentures. Convertible debentures are those debentures that can be converted into equity shares after the expiry of a specified period. Non- Convertible debentures are those which cannot be converted into equity shares.

7. ADVANTAGES When the company issues debentures it does not result in the dilution of Ownership as is the case with the issue of equity shares. Interest paid on a debenture is a tax deductible expense and hence company gets the tax benefit. Since debenture holders do not have any voting rights they do not interfere with the working of the organization. Debenture holders payment of interest is fixed and hence firm does not need to share profits with them.

8. DISADVANTAGES Payment of interest on debenture is mandatory and when company is making low profits. Nonpayment of interest can even lead to bankruptcy for the firm. Since on maturity they have to be repaid company needs to plan properly and keep funds for same. If company has not maintained enough funds it is a recipe for a disaster. Debentures are bought by large institutional investors and hence at times it may prove to be costly and difficult source of finance for the company.

9. Thank you