Types Of Debentures

Business is growing all over the world. In today’s era, people have switched their preferences from pursuing a job to doing their own business as it has long term benefits and more profitable life. But everyone is not acquitted with the large monetary investment needed to start or run a business. For this purpose, various people attract investments from various sources. 

One of the most significant sources for raising capital is equity. Equity is the part of profit and ownership in a company, but it is limited. If a person dilutes all the equity of a firm, they will start facing decision-making issues and the control of the firm will deviate. This is the reason that various other sources and instruments for raising capital are used. Among these are debt instruments. Debt instruments are used to borrow funds from the market in return for some interest. There are many debt instruments, but the most used ones are bonds and debentures. This article is specifically going to focus on debentures and its various types. 

Debentures

There are various kinds of instruments depending on the characteristics and terms of borrowing. Debentures come under the category of medium or long term debt instruments which a firm gives in return for some money borrowed and provides the person with a fixed amount of interest. Debentures are specifically bought and sold for monetary purposes as it does not give the person any right in the operations of the firm and one can transfer it whenever they want without any restriction. Debentures are the kinds of instruments that are less risky when compared to others and are given preference over other instruments, such as shares, when the firm goes bankrupt. Debentures are still very risky if they are unsecured and most of them are. One should always keep an eye on various factors while purchasing these instruments, such as the credit rating of a firm. With the growing business world, there have been various agencies incorporated that rate the credibility of these firms and a person should always check the ratings before investing their money. Another factor to be kept in mind is the credibility of the person issuing the debentures and the perks which come in handy with it. 

Debentures are a profitable option for a firm as when the company grows and thrives, debentures attract only a fixed sum out of the profit, but equity becomes part of the profit. Hence, from a firm’s point of view, selling debentures is better than diluting equity. It is a far better way to raise funds when compared to shares and can be easily reddened. It is a slightly better option for people who don’t want to take the risk of investing in equity as equity provides ownership, but one has to bear losses as well. On the other hand, debentures always get a fixed interest if the company has enough funds to do so. They are always preferred over shareholders.

Types of Debentures

Debentures are a debt to a firm, but they are preferred because there is no equity dilution. It is just a form of loan which is used for a company’s long term profit and growth. There are various types of debentures in the market and one should always know about these before choosing the one to be purchased. 

1. Convertible Debentures-  One of the various types of debentures is convertible debentures. The most significant feature of differentiation of a convertible debenture is that it can be converted into shares or stocks at a certain point in time or when the firm notifies of the same. Although these debentures have a lower interest rate when compared to stock, they are extremely useful. 

2. Partially Convertible Debentures- The debentures which can be converted into shares but to a certain limit or a certain percentage are known as partially convertible debentures. It is hybrid as after its partial conversion, some portion remains debenture while some become part of the company’s share.

3. Non- Convertible Debentures- These are normal or basic kinds of debentures which can never be converted into stocks after they have been issued and till the time they exist.

4. Registered Debentures- The kind of debentures which are transferred providing a pepper proof of records and documents needed for it. These are one of the safest kinds of debentures as there is less chance of fraud compared to bearer debentures discussed below.

5. Bearer Debentures- The type of debentures that are unregistered and can be delivered after purchase without any compulsory need for evidence or record are known as bearer debentures. There is no tertiary involvement in the transaction for a bearer debenture and it a comparatively more prone to tax evasion and fraud.

6. Secured Debenture- These are the kind of debentures that are like an alternative to a loan where the collateral is needed to make money and when the firm starts paying off the debts at the time of its closure due to any reason, then the secured debenture holders are paid first.

7. Unsecured Debentures- The type of debentures which don’t need any kind of collateral are unsecured debentures and are preferred less at the time of payment compared to secured debentures.

8. Redeemable Debentures-  The debentures which are purchases for a pre-specified period and are paid by the end of this time are known as redeemable debentures.

9. Irredeemable Debentures-  Also known as perpetual debentures, irredeemable debentures don’t have a fixed time for the redemption of the invested amount.

Conclusion

There are various kinds of debentures, all of which have their salient features and carry their advantages and disadvantages. It is the responsibility of the buyer to do a proper study before purchasing one.