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What Do Debentures Represent?

What Do Debentures Represent

Debentures represent the long term borrowings of a company. Debentures are a type of debt instrument that is unsecured with collateral. They are used by companies and governments to raise funds or capital. 

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

What Debentures Represent Means?

The Latin word "debere" means to take a loan or borrow money. Debentures are similar to unsecured loans, where in the event of default, the investor does not have any rights to company assets. The company which are issuing the debentures will make the interest payments on the debt before paying the share dividends to the shareholders. 

Debentures represent that the repayment depends solely on the creditworthiness and financial strength of the issuing company.  Companies may also issue them security. The company must pay creditors in the liquidation. The investors should first verify their credit ratings before investing in these instruments.

The companies can use debentures for raising the capital of the company because they have lower interest rates and shorter holding period. These kinds of instruments are more attractive. 

Therefore, they can be more appealing than other long-term debt instruments. Debentures are offered to the public issue at large, just as equity shares.

What are Equity Shareholders?

Equity shareholders are called Owners of the company. Equity shares represent the ownership of a company, Therefore, the capital raised by the issue of such shares is referred to as ownership capital, and the shareholders are called the owners of the company.

There are different types of equity shares that a company can issue. The various types of equity shares are as follows: -

1. Right shares

2. Bonus shares

3. Sweat equity shares.

Debentures represent the long-term debt of the company.

Debenture Holders are the people who own a debt of a company. Usually, the institutions like Banks, pension funds, and insurance companies are debenture holders. The interest rate on debentures can be fixed or variable rates. Debenture holders are the people or parties who provide loans to the company and receive a "debenture certificate" as proof of their participation.

What Are The Types Of Debentures?

A company can issue different types of debentures based on its objectives and requirements of capital. These are the types of debentures that are based on:-

1. Security

Secured Debentures are issued against collateral security. In case the borrower defaults, the debenture has to liquidate the assets of the company.

Unsecured Debentures represent the creditworthiness and goodwill of a company when they are issued to leverage the same. These debentures do not require collateral. These type of debentures are called as unsecured debentures.

2. Convertibility

Convertible Debenture Holders of Convertible debts have the option to convert their debenture assets into company equity shares. The details of the rights of debentures holders, dates for conversion of debentures, other details relating to the terms and conditions should be given by the company at the time of issue. 

Partly Convertible Debentures: The company issuing this type of debentures has the option to convert the debentures in part into equity shares. These types of debentures represent that when issuing an instrument, the company determines the conversion rate and the date of conversion. The creditors and shareholders both have the rights to hold the same.

Fully-Convertible Debentures: These types of debentures can be converted into equity shares by the issuer. At the time of issue, the rate and time of conversion are provided. The holders are given the same rights as company shareholders through conversion.

Non-Convertible Debentures: Non-Convertible Debentures are a regular debt instrument that doesn't allow holders to convert debt into equity. Debentures represent the instruments that usually have a higher interest rate than their regular counterparts. These instruments are still considered debt.

3. Tenure

Redeemable Debentures - The term "redeemable" is used for the redemption date. It is noted on the certificate. The issuer should repay the loan before the date of redemption.

Unredeemable Debentures - The redemption of debentures is possible at the time of liquidation of the company. These type of debentures are not redeemed at a specific time. 

4. Coupon Rate

These are Debentures based on: -

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

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

5. Registration

Registered Debentures: The issuing company keeps a register that records details about the holder of a debenture, such as a name, address, and particulars of holding. 

Bearer Debentures represent when they are delivered by courier. The details of the holder of debenture are not with the issuing company.

6. Redemption

Callable Debentures: The issuer company have power to redeem the debentures before their date of redemption. 

Puttable Debentures –The debentures holders can request the issuing company to settle the loan with a principal payment of the loan.

Subordinate Debentures- These debenture holders have the priority in repayment over other debenture holders in the event of liquidation.

Participating Debentures are very popular with venture capitalists. The interest will be paid in phases. The interest is not paid in the initial phase. The interest payable on debentures is lower in the middle phase. A higher interest is paid in the final phase.

 

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