Raghunandan Money – Investment Khushiyon Ka.

All You Need To Know About Debentures

Published : December 19, 2020

Types, advantages, and disadvantages of debentures

A debenture is a debt instrument that is used by corporations to borrow money for the medium to long term. These are the most common types of financial instruments that can be taken by a company. Debentures are generally repayable on a fixed date; however; some debentures are irredeemable. Most debentures are secured on credit history and based on the borrower’s assets. However, some debentures such as unsecured debentures are not based on collateral. A fixed-rate of interest is paid in most debentures, and the interest is paid before the dividend is paid to shareholders. For example, Muthoot Finance has issued its Non-Convertible Debenture in 2020, which has an interest rate of 7.35% and maturity of 60 months.

Type of Debentures

There are two types of debentures convertible and non-convertible debentures. Let’s discuss both the types in detail-

Convertible Debentures: Debentures that can be converted into equity shares of the issuing company after the predetermined period of time are called convertible debentures. These types of bonds are more attractive for investors as they have options to convert into equity shares. Moreover, it is also popular among companies as they have to pay a low rate of interest as compared to non-convertible debentures.

Non-convertible debentures: Debentures that cannot be converted into equity shares are called non-convertible debentures. These debentures carry more interest rates as compared to convertible debentures as they are not able to convert.

Advantages of Debentures

Debentures have advantages for both companies and investors. Let’s look at both in detail-

Advantages for Investors: Debentures provides a regular and fixed income for investors, so it is a safe investment option for investors. It has a fixed maturity date, which also attracts investors. A loan can be obtained from financial institutions by keeping the debenture as a mortgage. The interest of debentures is also protected by SEBI, which adds to the safety of this instrument. When it comes to liquidation, the debenture holders get the money first.

Advantages for Company: Debenture investment is made for long terms, so it provides money for a longer duration to the company. The company pays more in terms of dividends than debenture interest which makes it less expensive for the company to raise money. The finance happens in debt form, so the voting right is not given to debenture holders. When the stock market sentiment is weak, the money can be raised through debentures by giving an assured return to investors.

Disadvantages of Debentures

Debentures have disadvantages for both companies and investors. Let’s look at both in detail-

Disadvantages for Investors: Debenture holders do not have any voting rights over the management of the company. Interest income on debentures is taxable while shareholders may also get a dividend in terms of stocks rather than cash. They fluctuate in the market when there is a change in interest rate.

Disadvantages for Company: There is a legal obligation to pay the interest plus principal to investors, so the company has to pay money to debenture holders even if it made a loss in that time duration. Stamp duty is high when financing through debentures which is negative for the company.

Conclusion: Debentures are good for both companies and investors. Investors have the advantage of a fixed return, and the company has the benefit of long term financing. There are some disadvantages too of debentures, but advantages outweigh those. It gives better returns than other fixed income instruments, so investors have the benefit of more interest.

About Author

No Comments

Search Blog by Product Name
Open a Zero Brokerage Account Zero Brokerage Plan
Want to Trade at Lowest Brokerage?

Enjoy flexible trading limits at lowest brokerage rates ?

Open Your Investments Account Now 0Account Opening Charges Life Time Demat AMC Brokerage

  • PAN card is compulsory for opening Demat Account

Open Demat & Trading Account Online in Just 5 Minutes


Apply Now

RMoney's Rewarding Rafer & Earn

Videos

Want a Personalised Advice on your portfolio ? Talk to our Market Experts for FREE.
Register Now for a FREE Call Back.

  • PAN card is compulsory for opening Demat Account
×

Filing Complaints on SCORES (SEBI) – Easy & Quick

  1. Register on SCORES Portal (SEBI)
  2. Mandatory details for filing complaints on SCORES:
    1. Name, PAN, Address, Mobile Number, E-mail ID
  3. Benefits:
    1. Effective Communication
    2. Speedy redressal of the grieva`nces

https://scores.sebi.gov.in/dashboard

IT'S TIME TO HAVE SOME FUN!

Your family deserves this time more than we do.

Share happiness with your family today & come back soon. We will be right here.

Investment to ek bahana hai,
humein to khushiyon ko badhana hai.

E-mail
askus@rmoneyindia.com

Customer Care
+91-9568654321

×

Ab Trade Karo Tension Free

  • PAN card is compulsory for opening Demat Account

Don't worry, we hate spam as much as you do!

Please note that the brokerage charged against the above scheme should not in any ways exceed the amount as specified under the exchange bye laws.

  • Advance Brokerage is valid for Lifetime.
  • Balance Advance Brokerage can be refunded lifetime without asking any Question.
  • Pay Rs 299/- & Get Rs 499/- as advance Brokerage revesal*
  • Send Enquiry
    Open chat
    RMoney India
    Welcome to RMoney
    More Info visit at https://rmoneyindia.com/all-you-need-to-know-about-debentures
    How May I Help You?