Debentures

Debenture is a written acknowledgement of a debt by a company under its seal, and generally containing a provision as to payment of interest and repayment of principal.” Debentures carry interest at a certain percent. As it is a loan taken by company, it is repaid after a specified period or at the option of the company as per terms of the issue.Thus the debenture holders are the creditors of the company and get interest at a fixed rate, whether the company makes a profit or not.

Debenture is a document given by a company as evidence of a debt to the holder, usually arising out of a loan and most commonly secured by the charge.

According to Section 2(30) of the companies Act 2013 debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt.

Fully Convertible Debentures (FCD)

This is a kind of security in which the entire value can be converted into equity shares at the issuer’s notice. After conversion, the investor has the same as the ordinary shareholders of the company.

Partly convertible debentures: In this only a part of debenture is eligible to be converted into equity shares.

FCD gives investors an opportunity to participate in the growth of the country while reducing short-term risk. It happens or is forced only when it is beneficial to stockholders in lieu of FCD investors. A debenture is maintained by full faith and credit of the issuer.

It can help a firm surpass a difficult financial situation. If the issuer goes bankrupt then the FCD holders will receive nothing. A convertible debenture can be converted into common shares of the issuing company after a certain time.

Partly Convertible Debentures (PCD)

This is also a type of debt in which the loans have a predetermined portion that can be converted into stock. Some of the features of PCD are:

• Conversion Price

• Conversion Ratio

• Quantum of Conversion

• Convertible Value

• Time of Conversion

• Coupon

• Market Price

Being an amalgamated version, investors receive fixed interest rates and can partially convert their loan into equity when stocks are rising. But, in the case of bankruptcy, the PCD holders are paid only after the secured debt holders are paid. PCD is suitable only for a company with an established track record. The conversion also leads to a lower equity capital base, making them not-so-popular among investors.

Non-convertible debenture (NCD)

NCDs are a financial instrument used by companies to raise long-term capitals. These debentures cannot be converted into shares, but can offer benefits:

• High interest rates

• Liquidity

There are two types of NCDs:

• Secured NCDs

• Unsecured NCDs

Comparing to other fixed income debentures, NCDs offer higher returns to the investor and helps in diversifying the portfolio on a positive note. Issuance and trading of NCD investments are only in demat form and there is no tax deduction as per the provisions of Sec 193 of the IT Act.

NCD has a ‘call’ option that allows the company to ask the investor to give away the NCD in exchange for the principal investment.

Purpose of issuing debentures:

As stated above companies raise huge amount of long term loans by issuing the debentures. According to guidelines issued by Security Exchange Board of India (SEBI) a company can issue the debentures for the following objectives:

(a) For meeting expenditure on modernization of plant.

(b) Expansion and diversification of plant.

(c) For meeting long term requirements of working capital.

(d) For setting up new projects.