Debentures refer to that instrument or document which is issued by the company as an acknowledgement of debt which company owes from its debenture holders. Given below are the various important features of debentures –
Fixed Rate of Interest
The first and foremost feature of debenture is that it is debt in the books of company and it carries fixed rate of interest which company has to pay whether company is making profit or loss and hence payment of interest on debenture is compulsory.
No Voting Rights
Debentures do not carry any voting rights and hence debenture holders do not have any say in the company matters which is the reason why companies which do not want to dilute their control prefer to use debentures rather than equity for raising fresh capital into the company.
Debentures help the company in the form of leverage because interest on debentures is a tax deductible expense. In simple words interest on debenture will be deducted before tax is deducted from profits and hence company can reduce its tax liability by issuing debentures which is not the case with preference shares and equity shares as dividend paid to preference shareholders and equity shareholders is deducted from net profit after tax.
Debentures are of many types like secured debentures which are secured by company’s assets, unsecured ones which have no security but they carry higher rate of interest than secured ones, convertible debentures which have the option to convert into equity after some time, redeemable debentures which are redeemed after fixed period of time or non redeemable which are repayable only on the liquidation of company and so on.
Priority for Repayment
Debenture holders are given priority for repayment of dues from the company when a company goes into liquidation, therefore if a company is liquidated then first debentures holders will be paid after that preference shareholders will get payment and lastly equity shareholders will be paid.
As one can see from the above features of debentures, they are ideal for those classes of investors who do not want to take much risk and want constant return with safety of investment and as far as companies are concerned debentures are good for those companies which want to save tax and also want less dilution of control over the company.