Debentures or Bond: Unlocking Wealth: 5 Powerful Features
There are five remarkable features of debentures that I have mentioned in the article. A government of a country issues bond to borrow money, likewise, a company issues debentures to borrow money from investors. There are various types of debentures and today here in this article I will tell you 5 features of debentures.
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The remarkable characteristics of debentures are as below:
(1) Maturity: Although debentures provide long-term funds to companies, they mature after a specific period. Generally, are to be repaid at a definite period as stipulated in the issue. The company must pay back the principal amount on this on the given date otherwise holders may force the winding up of the company as creditors. However, a company can issue irredeemable or perpetual bonds or debentures which have no maturity date. The effect of issuing irredeemable debentures is that they do not have any Fixed time limit within which the company must pay back the principal amount of debentures and that is why the holders cannot force the company to pay them. But, it does not mean that the company can never redeem these. In that sense, all the debentures which are issued are redeemable or mature at one time or the other.
(2) Claims on Income: A fixed rate of interest is payable on debentures by the company. Unlike shares, a company has a legal obligation to pay the interest on due dates to the holders whether the company is in loss or profit. The default in payment of interest may cause the winding up of the company because the holders may take resources to law for the same.
(3) Claims on Assets: Even in respect of claims on assets, the holders have priority of claim on Assets of the company. They have to be paid first before making any payment to the preference for equity shareholders in the event of liquidation of the company. However, they may claim for the principal amount and the interest due only and do not have any share in the surplus Assets of the company, if any. Further, debentures may provide for a charge on the Assets of the company as a security to its holders. The holders may have either a specific charge on the Assets of the company or a floating charge over all the Assets of the company. The secured debentures entitle its holders to have a Priority over other unsecured creditors of the company, against the assets mortgaged to them. If the assets pledged to them are not sufficient to satisfy their claims, they rank Pari Passu with other unsecured creditors for the balance.
(4) Control: Since, debentures holders are creditors of the company and not its owners like shareholders, they do not have any control over the management of the company. They do not have any voting rights to elect the directors of the company for decision-making and determining policy implementation in the company or on any other matters. But at the time of liquidation of the company they’ve previous claim over shareholders and if remain overdue, they may take control over the company.
( 5) Call Feature: The issue of debentures occasionally provides a call point that entitles the company to redeem at a certain price before the maturity date. since the call attribution provides advantages to the company at the expenditure of its debenture holders, the call price is generally further than the issue price.