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Advantages and Disadvantages of Debentures


Posted Date: 31-Oct-2009  Last Updated:   Category: Education    
Author: Member Level: Gold    Points: 25


A debenture or a bond is an acknowledgement of a debt. In India distinction in made between debenture and bonds. In this article, we have given information about advantages and disadvantages of debentures.



A debenture or a bond is an acknowledgement of a debt. In India distinction in made between debenture and bonds.
Types of debentures

Types of debentures:

1. Simple naked or unsecured debentures: - These debentures are not given any security on assets. They have no priority as compared to other creditors.
2. Secured or mortgage debentures: - the se debentures are given a security on assets of the debentures company. In case of default in the payment of interest or principle amount, debenture holders can sell the assets in order to satisfy their claims.
3. Bearer debentures: - These debentures are easily transferable. They are just like negotiable instruments. The debenture is handed over to the purchaser without any registration deed.
4. Registered debentures: - as compared to bearer debenture which is transferred by mere delivery, registered debenture require a procedure to be followed for the transfer.
5. Redeemable debenture: - these debentures are to be redeemed on the expiry of ascertain period. The interest on the debenture is paid periodically but the principle amount is returned after a fixed period.
6. Irredeemable debentures:- such debentures are not redeemable during the life time of the company. There are payable either on the winding up of the company or at the time of any default on the part of the company.
7. Convertible debenture: - sometimes convertible debenture is issued by a company and the debenture holders are given an option to exchange the debenture into enquiry shared after the lapse of a specified periods.

Advantages

1. Control of company is not surrendered to debenture holders because they do not have any voting rights.
2. Trading on equity is possible as debenture holders get a lower rate of return than the earnings of the company.
3. Interest on debenture is an allowable expenditure under income tax act, hence incidence of tax on the company is decreased.
4. Debenture can be redeemed when company has surplus funds.

Disadvantages

1. Cost of raising capital through debentures is high of high stamps duty.
2. Common people cannot buy debenture as they are of high denominations.
3. They are not meant for companies earning greater than the rate of interest which they are paying on the debentures.


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