Banking Awareness- What is a Debenture?

As per Economic Times-” Mukesh Ambani led Reliance industries on Thursday raised 8,500 crore rupees through Non-Convertible Debentures issue, the Proceeds of which will be used to refinance debt at India’s most valuable conglomerate. Now this news becomes important for all the banking aspirants because of the way money is raised here. The term here to be focus is Non-Convertible Debentures. What is exactly NCD? How it is helpful in raising money? etc. We would try to explain you this topic in detail in this article. 

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It is important from exam point of view as well because such questions are asked in GA section under current affairs topics. Students are advise to have a knowledge about all these commonly printed terms in newspaper as they can asked in Interview as well. Banking awareness of a banking aspirant is expected to be sound enough to answer some of these basic terms. 

What Is Debenture?

A debenture is a medium or long term debt format that large companies use to borrow money. It is one of the most typical forms of long term loans that a company can take. In this type of loan, It  should be repaid on a specific date, but some debentures are irredeemable securities (sometimes referred to as perpetual debentures).

The company is expected to pay a fixed interest rate. Before dividends are paid to shareholders, this interest must be paid. Debentures are the secured form of investment in a company.

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Debenture Holders

Debenture holders (investors)  are generally not allowed to vote in the company’s general shareholders meetings, or have any executive power. They act like investors who have invested in a company and will get timely interest on that. Debentures holders  may have separate meetings or votes, for instance regarding changes to the rights associated with the debentures.

The interest paid to the debentures holder is calculated against the profit in the company’s financial statements.

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Types of debentures

Debentures are of two types namely: Convertible debentures and Non-Convertible debentures.

Convertible debentures: After a predetermined period, Convertible bonds or bonds that can be converted into equity shares of the issuing company. Debenture holders usually prefer to invest in convertible bonds  because the bonds can be converted, and to companies they have the advantage that they normally have lower interest rates than non-convertible corporate bonds.

Non-convertible debentures: These are less preferred form of debenture because these are the Standard debentures that can’t be converted into equity shares of the liable company. Since they can’t be converted, they usually have higher interest rates than convertible debentures.

Benefits Of Debentures

Major companies raise money through Debentures as they are beneficial to companies by having a lower interest rate than other types of loans, e.g. overdrafts. People like to invest in a company through debentures as it is a secure form of investment.
One of the main benefits of debentures to investors is that they can usually be sold in stock exchanges quite easily and they come with less risk than e.g. equities.

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