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What are debentures? What are their features?
Debenture means a document issued by the company as an acknowledgement of indebtedness to its debenture-holders and giving an undertaking to repay the debt at a specified date or at the option of the company. These are the instruments for raising long term debt capital. Debenture holders are the creditors of the company to which company pays the interest at a fixed rate and at the intervals stated in the debenture. No voting rights are given to the debenture holders. Usually debentures are secured by charge on the assets of the company. Following are the features of debentures:
1) Debenture holders of the company are the creditors of the company and not the owners of the company.
2) Capital raised by way of debentures is required to be repaid during the life time of the company at the time stipulated by the company. Thus, it is not a source of permanent capital.
3) Debentures are generally secured.
4) Return paid by the company is in the form of interest which is predetermined.
5) Debentures are very risky from company’s point of view for raising long term funds.
6) Risk on the part of debenture holders is very less.
7) Debenture holders do not carry any voting rights.
8) Debentures are a cheap source of funds from the company’s point of view.
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