{"id":518,"date":"2019-04-19T05:05:38","date_gmt":"2019-04-19T05:05:38","guid":{"rendered":"https:\/\/rta.saginfotech.com\/blog\/?p=518"},"modified":"2020-01-29T13:25:59","modified_gmt":"2020-01-29T13:25:59","slug":"know-about-debentures-types-advantages-disadvantages","status":"publish","type":"post","link":"https:\/\/rta.saginfotech.com\/blog\/know-about-debentures-types-advantages-disadvantages\/","title":{"rendered":"All You Need to Know About Debentures, Its Types, Advantages and Disadvantages"},"content":{"rendered":"\n<h2 class=\"wp-block-heading\"><strong>What are\nDebentures?<\/strong><\/h2>\n\n\n\n<p>A <strong>Debenture<\/strong> generally refers to a document that is issued by the company as evidence of its debt towards the debenture holders at a fixed rate of interest.<\/p>\n\n\n\n<p><strong>In layman terms,<\/strong> you can mark the debenture document as the acknowledgment receipt of the company\u2019s indebtedness towards its holders. Debentures are also known as the <strong>bond<\/strong>, which is generally an IOU between the borrower and the lender.  <\/p>\n\n\n\n<p>Debentures are also\na creditorship instrument as the holders of the debentures are the\ncreditors of the company. Interest on the debentures is also required\nto be paid by the companies to the holders at the pre-agreed time\nintervals, i.e. whether profit or loss the company must pay interest\nto the debenture holders. \n<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What is the Need to Issue Debentures?<\/strong><\/h2>\n\n\n\n<p>The answer to this question is very simple. <\/p>\n\n\n\n<p>Debentures are used as a loan instrument by the company owners to raise long-term debt capital from cautious investors through the issue of debentures for business expansion.  <\/p>\n\n\n\n<p>Debentures offer definitive <strong>investment security,<\/strong> safety as well as fixed rate of interest to the cautious investors; hence the company owners issues them so that they can quickly lend some money without getting stuck in lengthy bank loan and administrative processes.  <\/p>\n\n\n\n<p>Lastly, the\ncompanies also sometimes do not want to rely on their share capital\nsolely. Although, it is beneficial for the company\u2019s point of view,\nbut some investors are too hesitant to invest in the risk capital of\nthe company. Therefore, to attract such investors, debentures are\nissued by the company. \n<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What are the Advantages and Disadvantages of Debentures?<\/strong> <\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Advantages <\/strong>\n<\/h3>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>From the Company\u2019s Viewpoint <\/strong> <\/h4>\n\n\n\n<ul><li>Companies can\n\traise long-term debt capital easy for business expansion through\n\tdebentures \n\t\n\t<\/li><li>Debentures\n\tserve as a cheaper\/economical  method of fundraising for firms with\n\ta low rate of interest \n\t\n\t<\/li><li>Debenture\n\tholders do not own any voting rights; hence cannot interfere in the\n\tmanagement of the company. \n\t\n\t<\/li><li>Companies can\n\tgather funds easily through Debentures in comparison to equity and\n\tpreference shares. \n\t\n<\/li><\/ul>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>From the Investors Viewpoint <\/strong> <\/h4>\n\n\n\n<ul><li>Debentures offer greater security to investors who are largely cautious about their investment security.  <\/li><li>Debentures offer fixed returns to the investors  <\/li><li>Debentures prices are also unaffected of volatile monetary conditions and remain stable mostly. Due to very little price movement, the debentures area good option for investors.  <\/li><li>Debentures also act as a regular source of income for investors as they get fixed and regular interest.  <\/li><\/ul>\n\n\n<blockquote>\n<p><strong><em>Read More: <\/em><\/strong><a href=\"https:\/\/rta.saginfotech.com\/blog\/preferential-allotment-of-shares-process-benefits\/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"What is the Need, Process, and Benefits of Preferential Allotment of Shares? (opens in a new tab)\"><strong><em>What is the Need, Process, and Benefits of Preferential Allotment of Shares?<\/em><\/strong><\/a><\/p>\n<\/blockquote>\n\n\n<h3 class=\"wp-block-heading\"><strong>Disadvantages<\/strong>\n<\/h3>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>From the Company\u2019s Viewpoint <\/strong> <\/h4>\n\n\n\n<ul><li>The companies\n\talways have to pay cumulative interest on debentures regularly\n\tirrespective of profit or loss, which becomes a heavy burden during\n\tthe market recession. \n\t\n\t<\/li><li>In majority\n\tdebentures cases, the company assets are mortgaged with debenture\n\tholders as a security token; therefore, the company creditworthiness\n\tgoes below the expected level in eyes of public and banks. \n\t\n\t<\/li><li>Once debentures\n\tare issued, it also affects the company\u2019s capacity to raise\n\tfurther loans or advances from the banks or any other financial\n\tinstitutions in future.\n<\/li><\/ul>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>From the Investors Viewpoint <\/strong> <\/h4>\n\n\n\n<ul><li>Debenture\n\tholders do not possess any voting rights in the company. \n\t\n\t<\/li><li>Debenture\n\tholders get very limited interest payment in case of a well\n\tprosperous company. \n\t\n<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What are the\nDifferent Types of Debentures?<\/strong><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>1. On the Basis of Registration <\/strong> <\/h3>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Registered Debentures <\/strong> <\/h4>\n\n\n\n<p>\nThe debentures, which are payable to the registered debenture holders\n(Debenture holder\u2019s whose name is mentioned at both on debenture\ncertificate and in company\u2019s debenture holder register)  are known\nas the registered debentures. Such debentures can be transferable\nthrough transfer deed. \n<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Bearer\/Unregistered Debentures <\/strong> <\/h4>\n\n\n\n<p>Bearer or\nunregistered debentures are the ones which are easily transferable by\nmere delivery as it is not required for the debenture holders to\nrecord their names in the transfer register. The interest is also\npayable to the bearers. \n<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>2. On the Basis of Security <\/strong> <\/h3>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Secured Debentures <\/strong> <\/h4>\n\n\n\n<p>The debentures which\nare secured fully or partially by a fixed (e.g. charge on specific\nassets land, building, etc.) or floating charge (e.g. a charge on all\ncompany assets in general) on the company assets are known as the\nsecured debentures. \n<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Unsecured Debentures <\/strong> <\/h4>\n\n\n\n<p>The debentures which\ncarry no security (full or partial) over the company assets are known\nas the unsecured or naked debentures. Such debenture holders are\nknown as the unsecured creditors. \n<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>3. On the Basis of Redemption<\/strong><\/h3>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Redeemable Debentures <\/strong> <\/h4>\n\n\n\n<p>Redeemable\ndebentures are the ones which are payable after a specific time\ninterval as per the pre-decided terms. Sometimes such debentures can\nbe redeemed early by the holders as per the company&#8217;s discretion. \n<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Non-Redeemable Debentures <\/strong> <\/h4>\n\n\n\n<p>These debentures are\nalso known as the perpetual debentures and are not repayable during\nthe lifetime of the company along with no obligation from the\ncompany\u2019s side to pay the principal amount of the same. \n<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>4. On the Basis of Conversion <\/strong> <\/h3>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Convertible Debentures<\/strong><\/h4>\n\n\n\n<p>Convertible\ndebentures are the ones which can be easily transferred into equity\nor preference shares after a certain period as per the holder&#8217;s\ndiscretion. \n<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Non-convertible Debentures <\/strong> <\/h4>\n\n\n\n<p>The debentures which\ncannot be transferred or converted into the equity or preference\nshares post a certain time period are known as the non-convertible\ndebentures. \n<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>5. On the Basis of Priority <\/strong> <\/h3>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Preferred Debentures<\/strong><\/h4>\n\n\n\n<p>The debentures that\nare issued with security for being paid first at the time of company\nwinding up are known as the preferred debentures. \n<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Ordinary Debentures <\/strong> <\/h4>\n\n\n\n<p>Ordinary debentures\nare the ones that are issued with mortgaging any asset and are paid\nafter the preferred debentures during the winding up period. \n<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>6. On the Basis of Status <\/strong> <\/h3>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Equitable Debentures <\/strong> <\/h4>\n\n\n\n<p>Equitable debentures\nare the ones that are secured by the title deeds of the property with\nmemorandum creating a charge. In these types of debentures, property\nof debentures remains with the company itself.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Legal Debentures<\/strong><\/h4>\n\n\n\n<p>Legal Debentures are\nthose which are secured by the transfer of legal ownership of the\nproperty from the issuer to the holders. \n<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>7.  Based on the\nPari Passu Clause <\/strong>\n<\/h3>\n\n\n\n<p>The secured\ndebentures, which are discharged rateably are popularly known as the\ndebentures with <em>Pari Passu<\/em> clause. Even though, such\ndebentures are issued on different dates. \n<\/p>\n","protected":false},"excerpt":{"rendered":"<p>What are Debentures? A Debenture generally refers to a document that is issued by the company as evidence of its debt towards the debenture holders at a fixed rate of interest. In layman terms, you can mark the debenture document as the acknowledgment receipt of the company\u2019s indebtedness towards its holders. Debentures are also known [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":522,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v21.4 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Know About Debentures, Its Types, Advantages and Disadvantages<\/title>\n<meta name=\"description\" content=\"Know the complete details about debentures and its different types. 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