What are Debentures
Debentures are instruments that are issued by companies or government entities to borrow funds from the public in the form of debt. When an investor purchases a debenture, they are essentially lending money to the issuer, who agrees to pay them back the principal amount with interest at a specified date in the future.
Debentures can be secured or unsecured. Secured debentures are backed by specific assets of the issuer, such as land or buildings, which serve as collateral for the debt. Unsecured debentures, on the other hand, are not backed by any collateral, and rely solely on the issuer’s creditworthiness to attract investors.
Some of the key features of debentures include:
Interest rate: Debentures offer a fixed or floating interest rate, which is paid out periodically (usually annually, semi-annually or quarterly) to the investor. The interest rate on debentures is usually higher than that offered by savings accounts or fixed deposits, which makes them an attractive investment option for risk-averse investors.
Maturity: Debentures have a specified maturity date, which can range from a few months to several years. Once the debenture matures, the issuer is obligated to repay the principal amount to the investor.
Transferability: Debentures can be easily bought and sold in the secondary market, which means that investors can exit their investments before maturity if they need to.
Credit rating: Debentures are assigned a credit rating by credit rating agencies, which assess the issuer’s ability to repay the debt. A higher credit rating indicates lower credit risk, which translates into a lower interest rate for investors.
Debentures can be issued in various forms, including convertible debentures, non-convertible debentures, perpetual debentures, and zero-coupon debentures. Convertible debentures can be converted into equity shares of the issuer at a pre-determined price, while non-convertible debentures cannot be converted into equity shares. Perpetual debentures have no fixed maturity date, and zero-coupon debentures do not offer any interest payments, but are sold at a deep discount to their face value.
Debentures are a popular investment option for investors looking for a low-risk, fixed-income instrument that offers higher returns than traditional savings accounts or fixed deposits. However, investors should carefully consider the creditworthiness of the issuer before investing in their debentures, and also be aware of the risks associated with investing in the bond market, including interest rate risk and credit risk.
The procedure of issuing debentures and the rules governing Debentures vary with the type of Company. It shall be regulated by Articles of Association of the company, and Terms of issue of Debentures.
The content of this article is intended to provide general guidance on the subject matter. Specialist advice should be sought about your specific circumstances.
Key words: Debentures, Compulsorily Convertible Debentures, Convertibles, Loans, Corporate Transactions