Significant Advantages of Debentures in 2023

In this article you will get to know about advantages of debentures which you can take care of in the year 2023-24. So gain more information with us to know more.

The Latin word "debere" means to borrow money or take out a loan. A type of debt instrument that can or may not be secured with collateral is a debenture. They are used by companies and governments to raise capital from the public. 

It is simply a legal document that lists the principal amount, the interest rate and the payment schedule. At the maturity, the investor will receive the principal and the interest.

These loans are similar to unsecured loans, where the investor does not have any rights to company assets in the event of default. Repayment depends solely on the creditworthiness and financial strength of the issuing company. 

Counting the Advantages of Debentures

The issuing company will make the interest payments on the debt before it pays stock dividends to shareholders. Companies may also issue them security, e.g. They have an asset such as a mortgage counted as advantages of debentures.

The company must pay creditors in liquidation. Before investing in these instruments, investors should verify their credit ratings.   
They are preferred by risk-averse investors looking for a steady stream of income.   
In contrast to equity financing, debenture financing does not dilute the control of equity shareholders over management because debentures do not come with voting rights.  
Due to the tax-deductibility of interest, debentures are a cheaper form of financing than preference or equity capital. The corporation does not debenture any of its earnings.      
Debentures should be issued when sales and profits are expected to remain relatively stable.

Companies that have pledged all of their assets as collateral to another company can use debentures for capital raising. 

Because of advantages of debentures, they have a shorter holding period and lower interest rates, they are more attractive. They can therefore be more appealing than other long-term financing.

What Are the Features of Debentures?

These are the main features of debenture:

Promise

It is a written promise from the issuing company to pay the specified amount to the holder which lead to gain more advantages of debentures.

Face Value

The face value for debenture is usually the highest denomination at Rs.100, or multiples of Rs.100

Time of Repayment

The company issues it as a debt instrument with a maturity date. It basically specifies the repayment date for principal and interest. This will counted as a advantages of debentures to the holder.

Interest Rate

Holders receive an annual fixed rate interest payment, half-yearly or every year. This instrument's interest rate varies depending upon the nature of the business, current market conditions, and the company.

Guarantee of repayment

This long-term debt instrument comes with an assurance that it will be repaid on the due date as per the deed. They can also be redeemed at par or premium, or discounted.

Parties to Debenture

Company - This is an entity that borrows money.

Trustee - This is the party that deals with holders. The trust deed is an agreement between trustees, holders. This deed contains company obligations and rights, as well as other information.

Debenture holders are people or parties who provide loans to the company, and receive a "debenture certificate" as proof of their participation.

No Voting Rights

The holders are creditors to the company and have no voting rights at the general meetings of company except when the company asks them for their opinions in exceptional circumstances.

What are the types of Debentures?

A company can issue different types depending on its objectives and needs & advantages of debentures. These are the kinds of debentures that are based on :-

1. Security

Secured Debentures are issued against collateral security. In the event of default by the borrower, the debenture may liquidate that asset.

Unsecured Debentures are issued to leverage the creditworthiness and goodwill of a company. These debentures do not require collateral. They are also known as unsecured debentures.

2. Tenure

Redeemable Debentures have a redemption date. It is noted on the certificate. The borrower must repay the loan amount before the redemption date.

Unredeemable Debentures - These debentures cannot be redeemed at a specific time. Redeeming these debentures is only possible if the issuing company liquidates.

3. Convertibility

For gaining more advantages of debentures, convertible Debenture Holders of Convertible debts have the option to convert their debenture assets into company equity shares. The details of the rights of holders, trigger dates for conversion, conversion date, and other terms and conditions are provided by the company at the time of issue. They can also be classified as -

Convertible Partly Debentures: The issuing company has the option to convert them in part into equity shares. When issuing an instrument, the company determines the conversion rate and the date of conversion. As a result in advantages of debentures, both creditors and shareholders have rights to the holders.

Fully Convertible Debentures: These can be converted into equity shares by the issuing company. While issuing the instrument, the conversion rate and time for conversion are determined. The holders are entitled to the same rights as company shareholders upon conversion.

Optionally Convertible Debentures The holder can convert their debt to equity shares, or at a fixed price determined by the issuing company at issue.

Non-Convertible Debentures: Non-Convertible Debentures is a regular debt instrument that doesn't allow holders to convert debt into equity. These instruments usually have a higher interest rate than their regular counterparts. These instruments are still considered debt which make one of the most precious one for gaining advantages of debentures.

4. Coupon Rate

These are Debentures on the basis of:-

Special Coupon Rate Debentures: These have a predetermined coupon price.

Zero Coupon-Rate Debentures: These are free of coupon rates.

5. Registration

Registered Debentures: The issuing company keeps a register that records detail about the holder of a debenture, such as name, address, and particulars of holding. A transfer deed is required to transfer these debentures to consider them as an advantages of debentures to the holders.

Bearer Debentures are delivered by courier. The details of the debenture holder are not kept by the issuing company.

Pro tip..

You can buy debentures after checking upon the company registration status. 

6. Redemption

Callable Debentures The issuing company can redeem the debentures prior to their redemption date. These redemptions often occur at a premium.

Puttable Debentures - Here the holder of a debenture requests that the issuing company settle the loan with principal payment.

Subordinate Debentures These debentures holders have priority in repayment in the event of liquidation consider as advantages of debentures.

Participating Debentures are very popular with venture capitalists. The interest payments will be made in phases. There is no interest payment in the initial phase. The middle phase will see a lower interest payment. A higher interest payment in the final phase.

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