What are The Debentures?

What are the Debentures, How many Types of Debenture. How to Buy and make money, we will learn about all these questions in this post. In the Indian financial Market, These play a vital role in providing long-term funding solutions to corporations, while offering relatively secure investment avenues to investors. Though often overlooked in favor of equity shares or bank loans, debentures strike a crucial balance between risk and return.

Lets Understand

A debenture is a long-term financial instrument issued by a company to borrow money at a fixed interest rate. Unlike equity shares, debentures do not grant ownership or voting rights to holders. Instead, they are a form of debt where the company promises to pay back the principal with interest after a specified period. Debentures can be issued by both private and public companies and are governed by the Companies Act, 2013 and the Securities and Exchange Board of India (SEBI) regulations.

Lets Understand with the help of an Example : A company issues 10% debentures of ₹1,000 each, repayable after 5 years. Investors earn ₹100 yearly as interest and get ₹1,000 back after 5 years.

Key Features of Debentures

Fixed Interest Payments (Coupon Rate)
Fixed Interest Payments also known as Coupon rate. In this type, Debenture holders enjoys a fixed interest income, which is usually payable semi-annually or annually.
Maturity Period
Debentures have a maturity period, these are issued for a specific tenure, after which the principal is repaid.
No Ownership
One of the disadvantage is that Investors in debentures are creditors, not owners of the company.
Tradable Instruments
These are the Tradable Instruments. Certain debentures can be traded on stock exchanges, providing liquidity.

Types of Debentures in India

Debentures can be categorized in multiple ways, based on security, convertibility, tenure, and payment terms:

1. Based on Security

Secured Debentures: These are backed by the company’s assets. If the issuer defaults, the assets can be liquidated to repay investors.
Unsecured Debentures (Naked): These are not backed by collateral. They carry a higher risk but usually offer higher returns.

2. Based on Convertibility

Convertible: Can be converted into equity shares after a specific period or at the discretion of the investor or issuer.
Non-Convertible (NCDs): Cannot be converted into equity. These are pure debt instruments and often offer higher interest to compensate for lack of convertibility.
Partially Convertible: A portion of the debenture is converted into equity, while the rest remains as debt.

3. Based on Tenure

Redeemable: Have a specific maturity date for repayment.
Irredeemable (Perpetual): Do not have a fixed maturity and continue indefinitely unless the company chooses to repay.

4. Based on Mode of Payment

Registered: Issued in the name of the holder and cannot be transferred without the company’s records being updated.
Bearer: Transferable by mere delivery, and interest is paid to whoever holds them.

Benefits of Investing in Debentures

1. Steady Income

Debentures provide a fixed return through interest payments, making them attractive to conservative investors seeking predictable cash flow.

2. Lower Risk than Equity

Since debenture holders are prioritized over shareholders during liquidation, the risk is relatively lower.

3. Tax Benefits

Certain types of debentures (like tax-free bonds) offer tax advantages to investors under specific conditions.

4. Diversification

Including debentures in an investment portfolio helps diversify risk, especially in volatile equity markets.

5. Liquidity

Many debentures are listed on stock exchanges, providing investors with the flexibility to exit before maturity.

Conclusion

Debentures are a crucial component of the Indian debt market. For companies, they are a tool to raise long-term capital without diluting ownership. For investors, they provide a relatively safe and consistent source of income. However, like all investments, it’s important to assess the credit rating, issuer’s financial health, and market conditions before investing in debentures. As India’s financial market matures and diversifies, the role of instruments like debentures will continue to grow, offering valuable options for both issuers and investors alike.

डिबेंचर क्या होते हैं?

डिबेंचर एक प्रकार का दीर्घकालिक ऋण साधन (long-term financial instrument) होता है, जिसे कोई कंपनी निश्चित ब्याज दर पर पैसा उधार लेने के लिए जारी करती है।

डिबेंचर खरीदने वाला व्यक्ति कंपनी का मालिक नहीं बनता, बल्कि वह कंपनी को कर्ज देता है। कंपनी एक तय समय के बाद मूलधन (principal) और उस पर ब्याज (interest) लौटाने का वादा करती है।

ये डिबेंचर निजी और सार्वजनिक दोनों प्रकार की कंपनियों द्वारा जारी किए जा सकते हैं। इन पर कंपनी अधिनियम, 2013 और SEBI के नियम लागू होते हैं।

If you are interested in learning Share Market course in Delhi Call us Now at 8287996284 follow us on Instagram @mohsinmahfooz

What are the Debentures