A debenture is an unsecured debt instrument. Debentures are backed by the company’s creditworthiness or reputation and not by physical assets. They are long term debt instrument issued by the company and the government to raise funds. Like other bonds, debentures are documented in an indenture.
Types of Debentures:
Debentures are in two categories:
- Convertible debentures: These debentures can be converted to shares at a particular date or at a specific period of time. The interest rates of these debentures are less compared to the non-convertible debentures.
- Non-convertible debentures: These debentures can be converted to equity shares of the debenture issuing company. They have a higher rate of interest compared to the convertible debentures.
Benefits of investing in debentures
- Debenture holders are entitled to a fixed and regular income.
- Debentures provides higher rates of financial return, which is much more than any other investment.
- Debenture holders are entitled to interest whether the company is making profit or not.
- Debenture holder can sell or mortgage to the property for obtaining loans.
- Since the interest is tax deductible, the cost of debt is lower than the cost of equity shares.
- The interest of Debenture holder is protected by debenture trust deed and the guidelines set up by SEBI (Security and Exchange Board of India).