Debenture

Debenture - If a company needs funds for extension and development purpose without increasing its share capital, it can borrow from the general public by issuing certificates for a fixed period of time and at a fixed rate of interest. Such a loan certificate is called a debenture. Debentures are offered to the public for subscrip­tion in the same way as for issue of equity shares. Debenture is issued under the common seal of the company acknowledging the receipt of money.

Features of Debentures:

The important features of debentures are as follows:
1. Debenture holders are the creditors of the company carrying a fixed rate of interest.
2. Debenture is redeemed after a fixed period of time.
3. Debentures may be either secured or unsecured.
4. Interest payable on a debenture is a charge against profit and hence it is a tax deductible expenditure.
5. Debenture holders do not enjoy any voting right.
6. Interest on debenture is payable even if there is a loss.

Advantage of Debentures:

Following are some of the advantages of debentures:
(a) Issue of debenture does not result in dilution of interest of equity shareholders as they do not have right either to vote or take part in the management of the company.
(b) Interest on debenture is a tax deductible expenditure and thus it saves income tax.
(c) Cost of debenture is relatively lower than preference shares and equity shares.
(d) Issue of debentures is advantageous during times of inflation.
(e) Interest on debenture is payable even if there is a loss, so debenture holders bear no risk.

Disadvantages of Debentures:

Following are the disadvantages of debentures:
(a) Payment of interest on debenture is obligatory and hence it becomes burden if the company incurs loss.
(b) Debentures are issued to trade on equity but too much dependence on debentures increases the financial risk of the company.
(c) Redemption of debenture involves a larger amount of cash outflow.
(d) During depression, the profit of the company goes on declining and it becomes difficult for the company to pay interest.

Different Types of Debentures:

A company can issue different types of debentures for raising funds for long term purposes.
Different forms of debentures are :
Ordinary Debenture:
Such debentures are issued without mortgaging any asset, i.e. this is unsecured. It is very difficult to raise funds through ordinary debenture.
Mortgage Debenture:
This type of debenture is issued by mortgaging an asset and debenture holders can recover their dues by selling that particular asset in case the company fails to repay the claim of debenture holders.
Non-convertible Debentures:
A non-convertible debenture is a debenture where there is no option for its conversion into equity shares. Thus the debenture holders remain debenture holders till maturity.
Partly Convertible Debentures:
The holders of partly convertible debentures are given an option to convert part of their debentures. After conversion they will enjoy the benefit of both debenture holders as well as equity shareholders.
Fully Convertible Debenture:
Fully convertible debentures are those debentures which are fully con­verted into specified number of equity shares after predetermined period at the option of the debenture holders.
Redeemable Debentures:
Redeemable debenture is a debenture which is redeemed/repaid on a prede­termined date and at predetermined price.
Irredeemable Debenture:
Such debentures are generally not redeemed during the lifetime of the com­pany. So, it is also termed as perpetual debt. Repayment of such debenture takes place at the time of liquidation of the company.
Registered Debentures:
Registered debentures are those debentures where names, address, serial num­ber, etc., of the debenture holders are recorded in the register book of the company. Such debentures cannot be easily transferred to another person.
Unregistered Debentures:

Unregistered debentures may be referred to those debentures which are not recorded in the company’s register book. Such a type of debenture is also known as bearer debenture and this can be easily transferred to any other person.

Comments

Post a Comment

Popular posts from this blog

Discuss the methods of valuation of variable income securities?

Image
Discuss the methods of valuation of variable income securities? The term variable-income security refers to investments that provide their owners with a rate of return that is dynamic and determined by market forces.  Variable-income securities provide investors with both greater risks as well as rewards. Variable-income securities, also known as variable-rate securities, are typically valued by investors looking for higher returns than those offered by fixed-income securities.  The classic example of a variable-income security is common stock, which can offer investors virtually unlimited up-side growth as well as the complete loss of principal.  In exchange for this risk, investors in these securities demand higher returns than their fixed-income counterparts.  In addition to common stocks, examples of variable-income securities include: Equity shares are floated in the market at face value, or at a premium or at a discount. Only companies with a trac...
Read more

Discuss the various steps involved in portfolio investment process?

Image
Discuss the various steps involved in portfolio investment process? Portfolio is a combination of securities such as stocks, bonds and money market instruments. The process of blending together the broad asset classes so as to obtain optimum return with minimum risk is called portfolio construction. Individual securities have risk return characteristics of their own. Portfolios may or may not take on the aggregate characteristics of their individual parts. Diversification of investment helps to spread risk over many assets. A diversification of securities gives the assurance of obtaining the anticipated return on the portfolio. In a diversified portfolio, some securities may not perform as expected, but others may exceed the expectation and making the actual return of the portfolio reasonably close to the anticipated one. Keeping a portfolio of single security may lead to a greater likelihood of the actual return somewhat different from that of the expected return. Hence, it is...
Read more

Risk Return Trade off

Image
Risk Return Trade off    The world of investing can be a cold, chaotic, and confusing place. In this tutorial, we'll go through some of the theories that investors have developed in an effort to explain the behaviour of the market. We will discuss concepts, like risk return trade-off, rupee cost averaging and diversification, that are especially useful for individual investors. Deciding what amount of risk you can take while remaining comfortable with your investments is very important. In the investing world, the dictionary definition of risk is the chance that an investment's actual return will be different than expected. Technically, this is measured in statistics by standard deviation. Practically, risk means you have the possibility of losing some or even all of your original investment. Low risks are associated with low potential returns. High risks are associated with high potential returns. The risk return trade-off is an effort to achieve a balance between...
Read more