In the world of corporate, a debenture is a concept that is defined as a form of typical long-term loans that a company is allowed to take. It is yielded at a fixed rate of interest that a company can issue.
The purpose of issuing debentures is when there is a possibility of merging companies. It is also possible when there is setting up a new project or expansion of an already existing project. The fact often required to be cleared out is that debenture holders are not the owner of the company. They can be known as the creditors but not owners. It is also to be noted that a debenture holder is not equivalent to being a shareholder and does not have the right to be involved in the voting procedures in the company’s general meetings. The only time they have a say is during specific meetings when changes to the rights attached to the debentures are deliberated upon.
In earlier times, the legal terminology ‘debenture’ was basically a document that permitted to create the debt or acknowledge it. A debenture is just like a certificate of loan that showcases that the company will be liable to pay a particular amount with interest. The debentures are documented in an indenture. It should be known that debentures are freely transferable by the debenture holder. It is attributed to be a movable property. It is the terminology, which is more descriptive in nature.
The debentures are attributed to specify the dates of redemption, repayments of principal and the payment of interest. One should also be aware that debentures are considered risk- free. Due to its risk- free nature, it is not just corporations but even governments that issue debentures to raise funds. They can raise funds through debentures when there is a need for money and pays back when there are enough funds available in access.
One striking feature of debenture is that a debenture acknowledges in debt. The debentures rely on the reputation of the issuer and the credibility, as debentures do not have any collateral backing. The debentures can pay interest periodically, which is also known as coupon payments. The debentures are positive for companies as there are a lower interest rate and longer duration of repayment.
The main risk related to debentures is credit risk which means that investor’s capital is not repaid by the borrower. While the benefits of debentures include that, the company does not involve in profits in a debenture. The debentures are considered to be appropriate in the situation when sales are relatively stable. They are considered to be very crucial for raising long- term debt capital. The debenture issued by the company is in the form of an acknowledgment the particular company has borrowed money from the public.
It is also true that debentures put a long- term burden as well on the earnings of a company. There is a lot of greater risk when earnings tend to fluctuate.