Different types of debentures are as follows:
- Convertible Debentures
- (Non-Convertible Debentures)
- (Secured Debentures)
- (Unsecured Debentures)
- (Redeemable Debentures)
- (Perpetual Debentures)
Content:
- What are Debentures?
- Types Of Debentures
- Types Of Debentures – Quick Summary
- Different Types Of Debentures – FAQs
What are Debentures?
Debentures are a long-term financial instrument used by businesses to borrow funds from the public. They typically carry a fixed interest rate and a specified repayment date. This method of borrowing is popular among companies seeking to raise funds without relinquishing equity or control.
For example, if a company issues a debenture worth ₹1,00,000 with a 5% annual interest rate, it commits to paying the debenture holder ₹5,000 yearly as interest. At the end of the term, the company will repay the entire principal amount.
This arrangement allows the company to access the necessary funds for growth or operational expenses while offering investors a reliable income stream through interest payments. Additionally, since debentures are a debt instrument, they do not dilute existing shareholders’ ownership stake, making them an attractive option for companies aiming to maintain control while securing capital.
Types Of Debentures
Debentures come in various types: Convertible debentures allow debt-to-equity conversion, Non-convertible offer higher interest without conversion, Secured are asset-backed, Unsecured rely on company’s credit, Redeemable have a maturity date for principal repayment, and Perpetual debentures pay interest indefinitely without a repayment schedule for the principal.
Convertible debentures
Convertible debentures allow investors to convert their debt into equity shares of the issuing company after a specified period. The conversion terms, including the rate and timing, are predetermined while issuing these debentures. This type of debenture is attractive to investors who seek the potential upside of equity ownership while receiving interest payments.
Example: A company issues convertible debentures of ₹1,00,000 each at a 6% interest rate, with a conversion option into equity shares after 5 years at a predetermined rate. An investor opting for conversion might receive shares equivalent to their debenture’s value at the prevailing market price after 5 years.
Non-Convertible Debentures
Non-convertible debentures are a standard form of debenture that cannot be converted into equity shares. They are redeemed at their face value at the end of their tenure. They generally offer higher interest rates than convertible debentures, compensating for the lack of conversion benefit.
Example: An infrastructure company issues 10-year non-convertible debentures with a face value of ₹50,000 each and an annual interest rate of 8%. At the end of the 10 years, investors are repaid the principal amount of ₹50,000 without any equity conversion option.
Secured Debentures
Secured debentures are backed by the company’s assets, ensuring security for the debenture holders. In case of default, debenture holders have a claim over the pledged assets. This feature provides an added layer of security for investors, reducing the risk of loss.
Example: A real estate company issues secured debentures worth ₹2,00,000 each, backed by its commercial properties. If the company defaults on its payment, debenture holders have a claim over these properties to recover their investment.
Unsecured Debentures
Unsecured debentures do not have any collateral backing and are issued solely on the company’s creditworthiness. They carry a higher risk than secured debentures and, hence, typically offer a higher interest rate to attract investors.
Example: A technology startup issues unsecured debentures of ₹1,00,000 each, relying on its future growth prospects. These debentures have no asset backing but offer a high interest rate of 10% to compensate for the higher risk.
Redeemable Debentures
Redeemable debentures have a fixed term of maturity where the principal amount is repaid to investors. They are a common instrument for raising medium to long-term capital and often have a set redemption schedule.
Example: A pharmaceutical company issues redeemable debentures with a maturity period of 7 years, valued at ₹1,50,000 each, and an interest rate of 7%. The company must repay the principal amount to debenture holders at the end of 7 years.
Perpetual Debentures
Perpetual debentures, also known as irredeemable debentures, do not have a fixed maturity date. The principal amount is not repaid in the company’s lifetime, and investors receive periodic interest payments indefinitely.
Example: A utility company issues perpetual debentures of ₹1,00,000 each at an interest rate of 5%. Investors receive yearly interest payments indefinitely, as the principal amount is not repaid during the company’s lifetime.
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Types Of Debentures – Quick Summary
- Different Types Of Debentures include Convertible, Non-Convertible, Secured, Unsecured, Redeemable, and Perpetual Debentures, each suited for specific investment strategies and business needs.
- Debentures are long-term financial instruments used for borrowing funds with fixed interest rates and specified repayment dates, allowing companies to raise funds without diluting ownership and offering a steady income stream to investors.
- Convertible Debentures allow converting debt into equity shares after a set period, offering both interest income and potential equity ownership.
- Non-Convertible Debentures are standard debentures without the option for conversion into equity, offering higher interest rates and redeemed at face value at maturity.
- Secured Debentures are backed by company assets, offering security to investors with a claim over assets in case of default.
- Unsecured Debentures are issued based on the creditworthiness of the company without collateral, carrying higher risk but offering higher interest rates.
- Redeemable Debentures have a fixed term of maturity with the principal amount repaid at the end, commonly used for medium to long-term financing.
- Perpetual Debentures, also known as irredeemable, do not have a fixed maturity date, offering ongoing interest payments without principal repayment.
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Different Types Of Debentures – FAQs
What Are The Types Of Debentures?
Types of debentures are as follows:
- Convertible Debentures
- Non-Convertible Debentures
- Secured Debentures
- Unsecured Debentures
- Redeemable Debentures
- Perpetual Debentures
What are the different ways of issuing debentures?
Debentures can be issued through public offerings, private placements, or as part of a convertible debt offering. Each method caters to different investor bases and capital requirements.
What is a redeemable debenture?
A redeemable debenture is a debt instrument with a fixed term of maturity. The company must repay the principal amount to the debenture holders at the end of this term.
What are the two rights of debenture holders?
Debenture holders primarily have the right to receive regular interest payments and the repayment of the principal amount upon maturity. In the case of secured debentures, they also have a claim over the secured assets in the event of default.
Who owns a debenture?
A debenture is owned by the investor or holder who purchases it from the issuing company, giving them the rights to interest payments and principal repayment.
Are bonds a type of debenture?
Yes, in many contexts, bonds are considered a type of debenture, especially when they are unsecured. However, some jurisdictions often use the term ‘bond’ for secured debt instruments.
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