A debenture is a type of debt instrument that corporations use to borrow money for the medium to long term investment. These are the most common types of financial instruments that a company can use. Debentures are typically repayable on a predetermined date; however, some debentures are irredeemable. Most debentures are secured by the borrower’s credit history and assets. Some debentures, however, such as unsecured debentures, are not secured by collateral. Most debentures pay a fixed rate of interest, and the interest is paid before the dividend is paid to shareholders.
Types of Debentures:
Debentures that, after a predetermined period of time, can be converted into equity shares of the issuing company are known as convertible debentures. These bonds are more appealing to investors because they can be converted into equity shares. Furthermore, it is popular among businesses because it requires them to pay a lower interest rate than non-convertible debentures.
Non-convertible debentures are debentures that cannot be converted into equity shares. Because they cannot be converted, these debentures have higher interest rates than convertible debentures.
Advantages of Debentures:
Debentures provide investors with a consistent and fixed income, making them a safe investment option.
It also has a fixed maturity date, which appeals to investors.
A loan from a financial institution can be obtained by keeping the debenture as a mortgage.
The interest on debentures is also protected by SEBI, which adds to the instrument’s security.
When it comes to liquidation, the debenture holders are paid first.
Debenture investments are made for long terms, so they provide money to the company for a longer period of time.
Dividends are paid in greater amounts than debenture interest, making it less expensive for the company to raise funds.
Debt financing is used, so debenture holders do not have voting rights.
When the stock market is down, money can be raised through debentures by offering investors a guaranteed return.
Disadvantages of Debentures:
Debenture holders have no voting rights in the company’s management.
Debenture interest is taxable, and shareholders may receive a dividend in the form of stock rather than cash.
When interest rates change, they fluctuate in the market.
There is a legal obligation to pay interest and principal to investors, so the company is required to pay money to debenture holders even if it made a loss during that time period.
When financing through debentures, stamp duty is high, which is a negative for the company.
Debentures benefit both businesses and investors. Investors benefit from a fixed return, while the company benefits from long-term financing. Debentures have some drawbacks, but the benefits outweigh the drawbacks. It provides higher returns than other fixed income instruments, so investors benefit from higher interest rates. As an investor, if you planning to foray into debentures, you can contact us at Tradeplus to avail our wide range of services and expertise.