25 Avril 2021
In this article, we will discuss debentures, types of debentures, advantages, and disadvantages. So what is debentures meaning? A debenture is a dead instrument where a company can raise money through borrowing from the public in the past you may learn that how a company is a raising share fund through shares so there the company has to give the ownership to the shareholders whereas a company is not giving any kind of ownership to the debenture holders so this depends your holders are just our lenders to the business this is a simple explanation of debenture
Now let's go let's see the types of debentures. The first type based on security. If the debenture is backed by the assets of the company it is called secured debenture here the secured debenture holder can claim the assets of the company if the company goes bankrupt whereas unsecured debenture holders are not getting they cannot claim the assets if they come to know if something happens to the company and the second category based on the convertibility so there are convertible debentures and non-convertible debentures.
Convertible debentures can be converted to the equity shares of the company we know that equity shareholders are getting the ownership they have voting rights and they can take part in the profits of the company so if the debenture holder feels that the company is progressing or the profitability of the company is growing so this debenture holder can convert his debentures into equity shares so that he will be an owner and he will get the profits he can take part in the profits of the company and he has voting rights.
The second type is non-convertible of course they cannot be converted to equity shares. The third category is it is based on permanence. So we have two types redeemable and redeemable. The redeemable is depends yours will be redeemed. These debenture holders will get their money back after a fixed time frame whereas irredeemable debenture holders have to wait until the company is liquidated.
The fourth category based on priority. It is just the order at which the debenture holders are paid. We have two types, First, one mortgage debentures and the second category second mortgage debenture the first mortgage depends on your holders will be paid first, and then comes the second mortgage debenture. This is just the order at which they are paid the last category based on negotiability so we have two types registered debentures and bearer debentures.
The registered debenture is the debenture holder their name and the details are recorded in the register of debenture holders of the company. So we cannot transfer it because their names are already recorded. It can be transferred may be the directors have they have to sanction it. There is the second type that is bearer debenture. It is negotiable because their names and details are not recorded this is the these are the types now let's see the advantages as mentioned at the beginning the debentures are given a fixed rate of interest that is an advantage.
The first advantage, so if the company is not doing well or if the company is not making enough profit but still the debenture holders will get a fixed rate of interest which is fixed right at the beginning of the issuance, and the second advantage they are getting more interest than that of FD the interest which is a bank is paying to the fixed deposit it is lower than that of the interest which depends your holder is getting 99% if this probability and the third advantage liquidity, so most of the majority of these debentures are listed in the stock exchange so we can buy and sell that, means the liquidity is high for debentures and the last advantage all debentures are romantically related. So we can determine the risk involved in investing in depends looking at its rate. The ratings there are many rating agencies like Accra care crystal so we can look at the ratings of the debenture and decide so these are the advantages moving to that disadvantages what if the company goes bankrupt we have to wait we don't know when we will get the money back we have to embed it might be a long process and the rating which I mentioned the second disadvantage it can fluctuate what if any scam or any fraud happens in the company these ratings can change overnight this is again a disadvantage.