What is a Debenture

It is a means of loan through which the government or companies raise money. This is different from equity shares. The buyer of a debenture is actually a creditor of a company. The company or institution issuing debenture does not hold anything as mortgage, the buyer buys debenture in view of the company credentials and reputation.

The company or institution which issues debenture gives fixed interest to the creditors of a company (those who buy debentures). On the other hand, a share is a small part of company’s capital, whereas debentures appear as a long-term investment. In this, the company gives benefit the investors at a fixed rate of interest.

Debentures are a long term debt instrument. If a company requires more funds to disseminate it, and if the company does not want to increase its shareholder then it issues debentures. Under which any person can avail a fixed interest rate by putting money in the company for a fixed time. Debentures are issued to people by the same process, by which process a company issues a share. A debenture is issued by a company’s common seal.

Following are some of the main features of debenture.

(i) The debenture holder is the creditor of a company, which gets the benefit at fixed rate of interest.

(ii) The debenture holder does not require any voting rights.

(iii) Any debenture can be secured or unsecured.

(iv) Interest received under debenture depends on the total profit of the company.

(v) Interest on debentures are given when the company suffer loss.

Types of debenture

Based on convertibility

Convertible Debenture :- It would be a that debenture which can later be transformed into equity shares. It is in your hand whether you want to transform it or not.

Non-convertible Debenture :- This is the debenture which can not be later converted into equity shares.

Security based debenture

Secured Debenture :- Such debentures are called secured debenture on which issuer company gives security as the charge on some asset or set of assets which is known as secured debenture. when the issuer company fails on payment of both the principal or interest amount, the assets of the company can be sold to repay the liability to the investors.

Unsecured Debenture :- No security is provided in this kind of debenture, only on the basis of the company’s fame and name, people invest in such debentures.

Based on redeemability

Redeemable Debenture :- There is a limited time in this kind of debenture, and as soon as this time is completed, the debentures are redeemed by the company as soon as the maturity time is completed.

Irredeemable Debenture :-There is no maturity time of any kind in this debenture, Irredeemable Debenture is payable when the company will be closed or  liquidation.

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