Debentures are a type of financial instrument that companies issue to raise funds from the public. Essentially, a debenture is a loan agreement between a company and an investor, in which the investor lends money to the company for a specified period of time in exchange for regular interest payments.
Here are some key things you need to know about debentures:
Types of Debentures:
There are several types of debentures including Convertible debentures, Non-convertible debentures, Secured debentures, Unsecured debentures, Registered debentures, and Bearer debentures.
Features:
Debentures typically have a fixed rate of interest, which is paid to the investor at regular intervals until the maturity date of the debenture. The principal amount of the debenture is repaid to the investor on the maturity date.
Security:
Debentures can be secured or unsecured. Secured debentures are backed by assets of the company, while unsecured debentures are not.
Ranking of Debentures:
In case of insolvency or liquidation of the company, debenture holders rank above equity shareholders but below secured creditors.
Taxation:
Interest income received from debentures is taxed as per the individual’s income tax slab rate. However, companies issuing debentures have to pay a withholding tax on the interest paid to debenture holders.
Risks:
Investing in debentures involves credit risk, i.e., the risk of default by the issuer, and interest rate risk, i.e., the risk that the interest rate may fluctuate during the tenure of the debenture.
Marketability:
Debentures are typically listed on stock exchanges, making them more easily tradable than other fixed income instruments such as bank fixed deposits.
Overall, debentures can be a good investment option for investors looking for a fixed income instrument with relatively low risk. However, as with any investment, it is important to carefully consider the creditworthiness of the issuer and the terms of the debenture before investing.