Debentures are an important instrument for raising long term debt capital. It is a type of debt instrument that is not secured by physical assets or collateral. A company can raise funds through issue of debentures, which bear a fixed rate of interest. The debenture issued by a company is an acknowledgment that the company has borrowed a certain amount of money, which it promises to repay at a future date. Debenture holders are, therefore, termed as creditors of the company.
Debenture holders are paid a fixed stated amount of interest at specified intervals say six months or one year. They are the most common form of long-term loans that can be taken out by a corporation. A company can issue different types of debentures. Issue of Zero Interest Debentures (ZID) which does not carry any explicit rate of interest has also become popular in recent years. The difference between the face value of the debenture and its purchase price is the return to the investor.
Features of Debentures:
- Debenture holders are the creditors of the company carrying a fixed rate of interest.
- Debenture is redeemed after a fixed period of time.
- Debentures may be either secured or unsecured.
- Interest payable on a debenture is a charge against profit and hence it is a tax deductible expenditure.
- Debenture holders do not enjoy any voting right.