Debentures

Introduction

• Debentures are debt instruments used by companies and the government to issue loans. 
• Debentures are issued to raise capital to meet the expenses of an upcoming project or to pay for a planned expansion in business. 

Features of Debentures

• A debenture is redeemed after a fixed period of time. 
• Debentures may be either secured or unsecured. 
• Debenture holders do not have any voting rights.
• The interest on debentures is always payable at a fixed rate. Further, the company has to pay interest regardless of whether it makes profits or not.
• The company may either repay the debt or even convert the debenture into shares or other debentures.
• Debentures may or may not carry a charge on the company’s assets.
• Debentures are generally transferable. Debenture-holders can sell them on stock exchanges at any price.

Types of Debentures

Convertible vs. Non-convertible Debenture:  

• A convertible debenture is a bond that can convert into equity shares of the issuing corporation after a specific period. 
• Convertible debentures are hybrid financial products with the benefits of both debt and equity.
• Convertible debentures are attractive to investors that want to convert to equity if they believe the company’s stock will rise in the long term. 

• A Non-convertible debenture is a traditional debenture that cannot be converted into equity of the issuing corporation. To compensate for the lack of convertibility investors are rewarded with a higher interest rate when compared to convertible debentures.

Registered vs. Bearer Debenture:   

• When debts are issued as debentures, they may be registered to the issuer. In this case, the transfer or trading in these securities must be organized through a clearing facility that alerts the issuer to changes in ownership so that they can pay interest to the correct bondholder. 
• A bearer debenture, in contrast, is not registered with the issuer. The owner (bearer) of the debenture is entitled to interest simply by holding the bond.

Redeemable vs. Irredeemable Debenture: 

• Redeemable debentures clearly spell out the exact terms and date by which the issuer of the bond must repay their debt in full. 
• Irredeemable (non-redeemable) debentures, on the other hand, do not hold the issuer liable to repay in full by a certain date. Because of this, irredeemable debentures are also known as perpetual debentures.