Debenture & Bonds and how it functions

Debenture         

            Debenture as its name suggests it is a type of Debt that companies or government take from the investors. The word ‘debenture’ is taken from the Latin word ‘debere’ which means to borrow or loan. So, Debentures are written a monetary contract between the Government/ Firm and the person lending the loan, so it is somewhat like a loan certificate.

              When any company wants to expand its business they are in need of funds and Funds can be raised by Equity/ Stocks or Debenture. So here we will discuss the Debenture and Equity part is already discussed in the earlier blog. 

        It is a medium- to the long-term tool by which companies can borrow money from the investors with a contract of pat back at a fixed rate of interest in a pre-decided time frame. So it is a paper that clearly certifies that a particular company taking a loan from the investor is liable to pay back the money with a fixed rate of interest and in limited time. A debenture is different from the Share capital, as by borrowing loan from Investors, The company is in contract to pay back but the investor does not become part of their share. 

So in nutshell Debenture is:

    ⇒ Issued by Government and Private Firms both.

   ⇒ Generally long term Debenture is issued by Government while Short term  Debenture is issued by both.

   ⇒ A movable property i.e. holder can transfer his ownership freely to anyone on his/her will and company has no say in it.

   ⇒ It is a certificate of loan which has a fixed rate of interest and to be paid timely mentioned in the contract itself.

   ⇒ The person purchasing Debenture has no voting rights in the meetings of the company as he is not a part of the share capital of the company.

Advantages of Debentures

  ⇒ The biggest advantage of Debenture is for the firm where the company has no need to change in its equity as Debenture holder is not a part of their share capital.

  ⇒ Debentures provide an opportunity to investors for long term planning for their personal finances.

  ⇒ Debenture is usually cheap in purchasing.

  ⇒ It also helps in tax planning for an Individual as Debenture is generally tax-free.

  ⇒ It is the safest way to invest money in firms by any investor.

 ⇒ In the case of market crash and trembling of stocks of the company, Debenture holder will be paid first when the asset of the company is sold.

Types of Debentures

           Debenture issued by the Government/ Firms are classified into various types depending on the Security, tenure,  on convertibility option, etc and so different types are like these:

Secured Debentures: 

          These are debentures that are secured against an asset/ of the company. If the company fails to repay the Debt payment to the investor because of non-availability of the fund with a company than same will be made after selling the assets of the company.

Unsecured Debentures: 

             These are not secured by any charge against the assets of the company and this type of Debenture are generally not issued in India.

Redeemable Debentures: 

                Company is liable to pay the amount plus fixed rate of interest to the investor after a pre specifies time frame i.e. it can be redeemed when the time frame has lapsed.

Irredeemable Debentures: 

             This type of Debenture is not redeemable after a specific period of time and can be redeemed only when the company gets its liquidation or at the time of the dissolution of the company. This type of Debenture are also not issued in India and the maximum period of any Debenture issued in India is for 20 Years.

Fully Convertible Debentures: 

            In this type of Debenture, an option is available with the investor whether he wants to redeem his investment or else again want to reinvest. If he chooses the second option then, redeemed Debenture will be converted into the Shares of the company at a current price so by this he can become a shareholder of the company.

Partly Convertible Debentures: 

           In this type of Debenture portion of his Debenture will be converted to the shares of the company. The remaining portion of his Debenture will continue to act as Debenture only. So, in this way, Investor can be both Creditor and Shareholder to the company at the same time.

 Non-Convertible Debentures: 

             This is the most common type of Debenture and here no option lies with an investor to convert his redeemed debenture into share either partially or fully.

Bond and Debenture 

         both are the ways to raise funds by the Government and companies from the investors with a monetary contract to repay the investor with a fixed rate of interest. So technically both Debenture and Bonds are the same in a way but if go into details then we can find some differences among them. As a Debenture, you give an unsecured loan to the company while in terms of Bond you are giving a Secure loan to the company which is secured against the physical assets of the company.

⇒Bonds are more secure than Debentures as it is an unsecured loan

⇒Rate of Interest is less in terms of Bonds as compared with Debenture

⇒If there is any case of fraud by a company then Bondholder will be paid first and then the turn comes for Debenture Holders

⇒Debenture holder gets his/her Interest paid periodically to them and the principal amount back after a specified interval.

⇒Bondholders did not receive any periodical interest and get paid with all dues only after completion of tenure.