What are Debentures? The Big Difference Between Shares and Debentures

debentures

What are the Debentures?

Whenever a company needs funding for its extension and development, in such a situation, the company issue his shares. But if the company does not want to increase its share capital, then the company can borrow money from the public, by issuing some certificates, we call the debentures. These certificates are for fixed period times and the rate of interest is also fixed on it.

Features of Debentures

1. A debenture holder is the creditors of the company carrying a fixed Rate of Interest: 

Here creditors mean the money we have to pay. Then the company has to give all the money back to their debenture holder, along with a fixed interest. But the company does not have to refund the money in the stock. Because the company gives the shareholder a share in the company.

2. A debenture is Redeemed after a fixed period of Time:

The debenture is given only for the fixed time only. And as soon as the time is over, those debentures are redeemed by paying them. According to the Companies Act 2013, a company’s redemption date cannot be more than 10 years.

3. The debenture may either Secured or Unsecured

When we take the loan from anybody, we give it some security in return for money so that if the loan does not get lost in the future, then they can withdraw money from the securities sold. Similarly, the company’s debentures can be of two ways – Secured and Unsecured

Secured: When you pay the company money in secured, the company will give you an asset mortgage as security, so that you can become secure. If the same company closes or falls away for any reason, then you will have his security so that you can get your money back.

Unsecured: In this, you give your money to the company for its reputation basis. Suppose a company is earning good profits from the last 5 years and is doing well, in that case, the company does not have to give any securities to issue securities to the debentures. Because people buy their debentures on the basis of the company’s reputation.

4. Interest Payable on Debenture is the charge against profit and hence it is a tax-deductible expenditure

The interest debenture holder does not have any effect from the company’s profits. If the company is highly profitable then it will get the same interest and if there is less profit then the same interest will be available. The company can show interest in the expense to reduce its tax.

5. Debenture holder don’t enjoy voting rights

In the equity share, the shareholder gets the company’s ownership and voting rights. Such as the Election of Directors, etc. But the debentures holder does not get any rights. Because they are the creators of the company. So they can not interfere in the company’s mattress.

6. Interest on Debenture is Payable even if there is Loss

Debenture holders are given an interest in all circumstances, regardless of how much the company is going in the loss and also with fixed interest. On the other hand, equity shareholders are not given anything.

Can You Sell Debentures?

Now a question arises in your mind whether even the debentures can sell like stocks?

So the answer is yes! Debenture can be sold but not like shares. The buying and selling of shares are done by the stock market. But this does not happen in case of debentures. To sell debentures, the debenture holder can sell to another person through his broker.

Now this work can also be done in two ways. First of all, contact your broker and your broker will find the buyer on your behalf. Secondly, you find yourself a person and give the details of that buyer to your broker so that he gets better by him. The second one can be very costly and time-consuming.

Debenture holders only sell debentures when they require very urgent money. Since you get a fixed rate of interest in debentures, if you go to sell direct, you may lose it.

Types of Debentures

1. On the basis of Transferability or Records

It has two parts.

Registered debentures – All the details of the debenture holder are written in the register of the company. Therefore, he can not directly transfer his debenture to anyone. For that, the debenture holder will have to divide the section of the company’s directors first.

Bearer debentures – Any details of the debenture holder who have received the certificate are not written on his name and his name also does not register in the company. In such a case the buyer debenture can be transferred only according to its position. The person who has the certificate will be the holder of that debenture. For that, there will be no need to register a transfer in the company.

2. On the Basis of Redeemability

It is also divided into two parts.

Redeemable Debentures – This is debenture which the company can issue for a limited time. And as soon as that time period is over, the company redeems those debentures by taking the principal amount.

Irredeemable Debentures – In this, the company can not redeem debenture until the company closes. Such debentures are not issued in India.

3. On the Basis of Secured and Unsecured

We already know it in the feature section of debentures.

4. On the basis of Convertibility

It is also divided into two parts

Convertible Debenture – This means the debenture holder can convert his debenture into equity shares. The company is benefited from this because the investor is ready to buy this type of debenture on low-interest rates. In which they get the option to convert their debentures into shares in the future. It is already decided to issue these convertible debentures, how many shares will convert in exchange for a debenture value.

Non-convertible debenture – The same does not have such a facility that the debenture holder can convert his debenture into shares.

 

Also read:  What is Inflation? Definition, Types, Effects, and Control of Inflation

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