Importance of Debentures - Zoefact

An issue of debenture plays a great role in long-term planning and decision-making. In a modern competitive business era, every company needs funds for any business opportunity. Both corporations and governments frequently issue debentures to raise capital or funds. This financing can be fulfilled only by issuing the owner’s capital and debt capital.

The issue of debenture, on one side, creates the obligation for the payment of interest at a fixed rate and on another side, it causes an increase in earnings per share due to a comparatively less number of shares issued. Debentures as a source of finance suit companies that have regular earnings to service the debt have a higher proportion of fixed assets in the structure of their assets which offers adequate security and motivates investors.

The following points are being produced for their importance:

(1) Debenture holders or suppliers of loan capital have no controlling interest in the company.

(2) Debentures are important to pay interest expenses at a fixed rate.

(3) Finance is available for a fixed period certainly and thus the company can adjust its investment plans suitably by taking into account the funds available.

(4) Debentures are important to meet the requirement of long-term capital budgeting.

(5) Debentures enhance the earnings of equity holders through the operation of financial leverage.

(6) Debentures help to maximize earnings per share. Earnings per share can be maximized because of the benefit of financial leverage

(7) It helps to mobilize public savings and funds in the form of investment. In depressed market conditions debentures play an important role in providing a good source of finance for a company and is beneficial to the investors.

(8) Debenture is a less costly source of financing for the company. The cost of debenture is lower than the cost of equity. Debentures help to reduce the burden of income tax since interest is charged against profit and loss accounts.

(9) Debenture is the most suitable form of long-term source of financing. It provides long-term finance to the company on easy and cheap terms. The cost of debt is lower than the cost of equity or preference shares as interest is tax-deductible.

(10) Debentures provide the way, to use leverage in the capital structure of the company.

(11) Debenture helps in the mobilization of savings from the public particularly from those investors who are risk aversive.

(12) Debenture helps to minimize the tax burden of the firm because the amount of interest is deducted from the income.

Advantages of Debentures 

• Financial backers who need fixed pay at lesser danger lean toward them. 
• As a debenture doesn't convey casting a ballot rights, financing through them doesn't weaken control of value investors on administration. 
• Financing through them is less exorbitant when contrasted with the expense of inclination or value capital as the interest installment on debentures is charge deductible. 
• The organization doesn't include its benefits in a debenture. 
• The issue of debentures is suitable in the circumstance when the deals and profit are generally steady. 

Drawbacks of Debentures 

• Each organization has certain acquiring limit. With the issue of debentures, the limit of an organization to additionally acquire reserves diminishes. 
• With redeemable debenture, the organization needs to make arrangements for reimbursement on the predetermined date, in any event, during times of monetary strain on the organization. 
• Debenture put a lasting weight on the profit of an organization. Hence, there is a more serious danger when the income of the organization change. 

Kinds of Debenture 

1. Gotten and Unsecured: 

Gotten debenture makes a charge on the resources of the organization, consequently selling the resources of the organization. Unstable debenture doesn't convey any charge or security on the resources of the organization. 

2. Enrolled and Bearer: 

An enrolled debenture is recorded in the register of debenture holders of the organization. A normal instrument of move is needed for their exchange. Conversely, the debenture which is adaptable by simple conveyance is called conveyor debenture. 

3. Convertible and Non-Convertible: 

Convertible debenture can be changed over into value shares after the expiry of a predetermined period. Then again, a non-convertible debenture is those which can't be changed over into value shares. 

4. First and Second: 

The subsequent debenture is what is paid after the primary debenture has been repaid. In a modern competitive business era, every company needs funds for any business opportunity. Both corporations and governments frequently issue debentures to raise capital or funds. This financing can be fulfilled only by issuing the owner’s capital and debt capital.

Read More