What are Debentures

 

What are Debentures

Debenture is a bond or a debt instrument which is not secured by collateral. Companies or government issue debentures to raise capital and funds requirement for their organization. Companies borrow money at a fixed rate of interest via debentures.

Every company needs capital to expand their business. While many of the companies issue their shares in public via an IPO but not everyone is capable to do so. Issuing an IPO is not feasible for every company or government body especially if the company is new. Thus, company issues debentures to lend money from investors.

Features of Debenture

• Face Value: Debentures has face value generally higher than ₹100.
• Certificate of Promise: A certificate is issued by the company to the debenture’s holders with all details of particular debenture for which investor has invested money in.
• Interest Rate: Debenture’s holders receive a fixed rate of return on the invested money at regular interval of time. Interest rate may vary company to company.
• Maturity Date: Maturity date indicates the date on which the company must pay back all the money to the particular debenture’s holder with principal and interest.

Drawbacks of Debenture

• If company does not make profit, then it becomes difficult for company to pay interest.
• Even if the market interest rate is rising, it does not make any difference in interest rate of fixed rate debentures.
• Debentures increases financial burden on the company.
• Company’s borrowing capacity reduces with the issue of debentures.


Also Read: Types of Debentures

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