Meaning of Debentures:
It is a document issued by a company under its seal as an acknowledgement of its debt. Holder of the debenture certificate is called debenture holder.
Merits of Debentures:
1. Low Cost –
Issue of debentures costs less and their, maintenance cost is also very low.
2. No change in company control –
Debenture holders do not have any voting rights and hence debenture financing does not result in dilution of control of equity shareholders.
3. Accepted Interest Expenditure –
There is a fixed rate of interest paid to debenture holders. They do not participate in the sharing of profits when the company earns higher profit.
4. Flexible –
Debenture holders have the priority of refund of their loan prior to shareholders.
5. Low Rate of Interest –
The interest paid to debenture holders is considered as a tax-deductible expense.
6. The attraction of More Investors –
The issue of debenture is suitable in the situation when the sales and income of the company are stable.
Demerits of Debentures:
1. Fixed Burden –
Payments of Interest is a fixed obligation of the organisation, whether the company is earning profits or incurring a loss.
2. Lack of Confidence –
Those companies which have more of debentures, their credit in the market goes down, therefore financial institutions lose confidence in providing loans to them.
3. The burden on Assets –
The debentures are issued against charge/mortgage of assets. This reduces the creditworthiness of the company.
4. No Voting Rights –
The debenture holders have no voting rights. They are always dependent upon the shareholders.
