What is a debenture?
Debenture is one of the financial securities traded in capital markets.
It is defined as a long-term promissory note for raising loan capital where the company promises to pay interest and principal as stipulated.
Who can issue debentures?
Debenture can be issued by both corporations and governments.
An alternative form of debenture is a bond, mostly issued by public sector companies.
What are the features of debentures?
- Debenture is a form of loan capital for the company.
- The purchaser of debenture is called debenture holder. So, a debenture holder is a creditor of the company.
- The par value of a debenture is the face value mentioned on the debenture certificate.
- The interest rate on a debenture is fixed and known at the time of purchase. Interest is a percentage of this par value.
- The legal agreement between company and debenture holder is called indenture or debenture trust deed. It includes the specific terms of the agreement, description of debenture, rights of debentures holder, etc.
- Debenture can either be secured or unsecured. Secured debenture is secured by lien on the company’s specific asset. However, unsecured debenture is not protected by any security.
- The credit rating of debenture indicates the degree of its safety. Credit ratings are provided by Credit Rating and Information Services of India (CRISIL) and few other rating companies like CARE and ICRA in India.
- Companies issue debenture in different denominations. But, public sector companies issue bonds in the denomination of Rs. 1000.
- Debenture is issued for a specific period of time.
- The maturity of debenture is the time period until the company returns the par value to debenture holder and terminates the debenture. Usually, a debenture is redeemed after 7 to 10 years of payment.
What are the advantages of debentures?
- Fixed and stable interest income.
- Definite maturity period
- Ease of trading and liquidity
- Comparatively safer investment as debenture holder has specific or a floating charge on the secured asset of the company
- Preferential right of payment at the time of liquidation of the company
- Interest is protected as per indenture provisions and SEBI guidelines
What are the disadvantages of debentures?
- No voting rights
- Returns limited to the extent of interest, irrespective to higher or lower earnings of the company
- No share in profits
- Debenture holder is only creditor to the company, has no ownership of company
- Interest on debentures is fully taxable
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