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           Debenture as its name suggests it is a type of Debt that companies or governments take from the investors. The word is taken from the Latin word ‘debere’ which means to borrow or loan. It is like a written monetary contract between the Government/ Firm and the person lending the loan, so you can say that it is somewhat like a loan certificate.

When any company wants to expand its business, they need funds. There are multiple ways to collect funds from the market. Either the firm can go to banks and ask for a loan but to acquire a loan firm has to keep something as a guarantee who will pay the entire loan in the event the firm is unable to pay off the loan. Or the firm can approach the public to raise money but it can not directly collect money from the market.

To raise funds from the public, the firm has to opt for an option out of Equity stocks or Debt. We will discuss the term Debenture (Debt) and its related details in this blog and the Equity part will be discussed in another blog.

what is Debenture

What is Debenture or Debt fund    

It is a Medium- to Long-term market tool by which the companies can borrow money from the investors with a contract at a fixed rate of interest for a pre-decided time frame. It is a paper that clearly certifies that a company is taking a loan from the investor and is liable to pay back the money with a fixed rate of interest in a limited time. Here, companies are raising capital to expand their business from the market and will be going to pay the money with interest back.

A Debt is different from an Equity Share, as herein Debt, a company is borrowing loans from Investors and it is in contract to pay back. So the company is attached with the person through this contract of paying back the money along with interest and nothing else. Here the moneylender will not become part of that company and can not claim any share of that firm.

Types of Debentures

           Debenture issued by the Government/ Firms are classified into various types depending on the Security, tenure, convertibility option, etc and so different types are like these:

types of debenture

Secured Debentures

          This type of debenture is secured against an asset of the company. If the company fails to repay the Debt payment to the investor because of the non-availability of the fund, then the investor will be paid after selling the assets of the company.

Unsecured Debentures

             These are not secured by any charge against the assets of the company and this type of Debenture are generally not issued in India. Debentures are backed only by the creditworthiness and reputation of the issuer.

Redeemable Debentures

                The company is liable to pay the amount plus fixed rate of interest to the investor after a pre specifies time frame i.e. it can be redeemed when the time frame has lapsed.

Irredeemable Debentures

             This type of Debenture is not redeemable after a specific period of time and can be redeemed only when the company gets its liquidation or at the time of the dissolution of the company. This type of Debenture is also not issued in India and the maximum period of any Debenture issued in India is for 20 Years.

Fully Convertible Debentures

          In this type of Debenture, an option is available with the investor whether he wants to redeem his investment or else again want to reinvest. If he chooses the second option then, redeemed units will be converted into the Shares of the company at a current price so by this he can become a shareholder of the company.

Partly Convertible Debentures

           Partially Convertible Debenture is one in which a portion of the investment by investors will be converted to the shares of the company. The remaining portion of his purchase will continue to act as Debenture only. So, in this way, Investors can be both Creditors and Shareholders to the company at the same time.

 Non-Convertible Debentures

             This is the most common type of Debenture and here no option lies with an investor to convert his redeemed debenture into a share either partially or fully. So, here to attract the customers, these types of Debentures comes with a high rate of interest.

Difference between Debenture & Bond 

         Both Debt and Bonds are ways to raise funds by the Government and companies from the investors with a monetary contract to repay the investor with a fixed rate of interest. Technically, both Debt and Bonds are the same but if we go into details then we can find some differences among them. As a Debenture holder, you are giving an unsecured loan to the company while in terms of Bond you are giving a Secure loan to the company. A secured loan means the loan is secured against the physical assets of the company and you will be paid first when the company defaults in any way.

⇒Bonds are more secure than Debenture as it is an unsecured loan

⇒Rate of Interest is less in terms of Bonds as compared with Debts

⇒If there is any case of fraud by a company then Bondholder will be paid first and then the turn comes for Debt Holders

⇒Debt holder gets his/her Interest paid periodically to them termed as a coupon and the principal amount back after a specified interval.

⇒Bondholders did not receive any periodical interest and get paid with all dues only after completion of tenure.

⇒ The debt part is riskier while Bonds are less risky.

⇒ A bond can not be converted into equity shares while Debt can be easily transferred to equity funds.

⇒ Bonds can be considered as long term investments whereas the tenure of Debt totally depends on the organizations issuing it.

⇒ Bonds can be issued by both Public/Private Organisations whereas Debenture is generally issued by private bodies.

Nowadays there are many schemes from the Mutual Fund companies through which you can invest in these so-called secured modes of investment and the process is hassle-free. But before start investing, it is advised to go through some basics of investment and personal finance so that it will help you get some insight into the world of wealth creation.

Since debts have no collateral backing, they must rely on the creditworthiness and reputation of the issuer for support. Both corporations and governments frequently issue debts to raise capital or funds. SEBI (Security Exchange Board of India) is the regulator of the commodity and security market in India and all the Mutual Fund must be registered with SEBI. SEBI can be visited through its Official website and It keeps an eye on the performance and default and accordingly provide guidance to the houses for the sake of consumers.

Advantages of Debentures

  ⇒ The biggest advantage of it is for the firm where the company does not need to change in its equity as the Debt holder is not holding the share of the company.

  ⇒ It provides an opportunity for investors for long term planning for their personal finances.

  ⇒ Debts are usually cheap to purchase as compared to the share of the company and hence you can afford them easily.

  ⇒ It also helps in tax planning for an Individual as Debenture is generally tax-free.

  ⇒ It is the safest way to invest money in the firm by an investor keeping out himself out of any risk associated with market fluctuations.

 ⇒ In the case of the market crash, there is very little fear for a Debenture holder. The Debenture holder will be paid first when the asset of the company is sold in the case of the worst performance of the company under market fluctuation.

advantage of debenture

Debenture in nutshell

 ⇒ A debenture is Issued by both Government and Private Firms.

⇒ Generally, the Government issues long term Debt while a short term Debt can be issued by both Private and Govt companies i.e Private companies usually issues a short term Debenture.

⇒ A debenture is a type of market instrument that is not backed by any security of the company and generally has a term longer than 10 years.

⇒ Debt is a movable property i.e. holder can transfer his ownership freely to any out of his/her wills and the company has no say in it.

⇒ It is a loan certificate with a fixed rate of interest and to be paid time as mentioned in the contract itself.

⇒ The person purchasing Debt has no voting rights in the company’s meetings as he is not a part of the company’s because he is not holding any share of the company.

⇒ Some debentures can convert to equity shares while others cannot.


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