24. Detailed Information On Debentures from Financial Management Subject

Summary

In this educational video from Devika's Commerce and Management Academy, the focus is on debentures, a type of debt instrument issued by companies. Debentures are certified documents secured by government certification, ensuring safety for investors. They come in various types, including secured, unsecured, redeemable, irredeemable, guaranteed, and convertible. The video discusses their features like long maturity periods, fixed interest rates, and lack of voting rights. It also highlights the advantages of debentures, such as long-term financing and tax benefits, and the disadvantages, including fixed interest returns and no voting rights, emphasizing the importance of understanding these financial instruments for students of commerce and management.

Takeaways

• 📜 Debentures are debt instruments issued by companies, acting as a certificate of debt with interest payments to holders.
• 🔐 Debentures are considered safe investments as they are certified by the government and regulated by financial authorities like SEBI.
• 💼 Companies typically issue a limited number of debentures and face restrictions on further issuance, making them less common than equity shares.
• 💰 Debenture holders are entitled to a fixed interest rate, which is guaranteed and must be paid by the company regardless of profitability.
• 🏦 In the event of liquidation, debenture holders are paid off before preference shareholders and equity shareholders, reflecting their creditor status.
• 🔑 There are six types of debentures: Secured, Unsecured, Redeemable, Irredeemable, Guaranteed, and Convertible, each with distinct characteristics.
• 📈 Redeemable debentures can be redeemed by the company after a certain period, while irredeemable debentures remain with the company indefinitely.
• 🔒 Secured debentures are backed by company assets, providing more security to the holders compared to unsecured debentures.
• 📉 Convertible debentures offer the option to be converted into equity shares, providing potential for capital appreciation.
• 🏢 Debenture holders do not have voting rights and are not involved in the company's management decisions, as their investment is a loan to the company.

Q & A

What are debentures?

Debentures are a type of debt instrument issued by a company to raise capital. They are a document certified by the government and represent a loan to the company, which is repaid with interest over time.

Why are debentures considered safe to buy?

Debentures are considered safe because they are certified by the government and regulated by the Securities and Exchange Board of India (SEBI), ensuring a level of protection for investors.

What are the two main points to remember about debentures?

The two main points to remember about debentures are that debenture holders are entitled to receive interest at any cost, and in the event of liquidation, debenture holders' investments are paid off first as they are considered creditors of the organization.

What are the different types of debentures mentioned in the script?

The script mentions six types of debentures: Secured, Unsecured, Redeemable, Irredeemable, Guaranteed, and Convertible.

What is the difference between secured and unsecured debentures?

Secured debentures are backed by the company's assets, giving the debenture holders a claim on those assets in case of liquidation. Unsecured debentures, on the other hand, do not have any security over the company's assets.

What are redeemable and irredeemable debentures?

Redeemable debentures can be redeemed or repaid by the company after a certain period, while irredeemable debentures do not have a maturity date and remain with the company until it ceases to exist or winds up.

How do guaranteed debentures differ from other types of debentures?

Guaranteed debentures offer additional security as the repayment is guaranteed by a third party, such as a bank or another company, in addition to the issuing company.

What are convertible debentures and how do they work?

Convertible debentures can be converted into equity shares of the company. This conversion can be either fully or partially, depending on the terms set at the time of issuance.

What are the main features of debentures?

The main features of debentures include a long maturity period, residual claims in income and assets, no voting rights, and a fixed rate of interest.

What are the advantages of issuing debentures for a company?

The advantages of issuing debentures include providing a long-term source of finance, a fixed rate of interest, income tax deductions, and protection for debenture holders.

What are the disadvantages of debentures for both the company and the investors?

Disadvantages for the company include the fixed interest burden regardless of profits, no voting rights for debenture holders, high risk due to mandatory interest payments, and restrictions on further issues. For investors, the disadvantages are the fixed rate of interest and no participation in company decisions.

Outlines

00:00

📜 Introduction to Debentures

The speaker introduces the topic of debentures, explaining that they are a type of debt instrument issued by companies. Debentures are documents that are certified by the government, ensuring their legitimacy. They are considered safe for investors as they are regulated and companies are obligated to pay interest on them. The speaker also mentions that the issuance of debentures is typically limited, and in the event of liquidation, debenture holders are paid off first due to their creditor status. The paragraph concludes by stating that debentures are a form of debt for the company and that the interest and principal are secured.

05:01

🔑 Types and Features of Debentures

This paragraph delves into the different types of debentures, which include secured and unsecured debentures, redeemable and irredeemable debentures, guaranteed debentures, and convertible debentures. Secured debentures have collateral backing them, while unsecured debentures do not. Redeemable debentures can be repaid after a certain period, whereas irredeemable debentures remain with the company until it ceases to exist. Guaranteed debentures offer additional security through guarantees from banks or other entities. Convertible debentures can be exchanged for equity shares. The paragraph also discusses the features of debentures, such as having a long maturity period, receiving residual claims on income and assets, lacking voting rights, and offering a fixed rate of interest.

10:05

🌟 Advantages and Disadvantages of Debentures

The speaker outlines the advantages of issuing debentures, including providing a long-term source of finance, offering a fixed rate of interest which is beneficial for budgeting, and allowing for income tax deductions. Debenture holders are also protected as they are paid first in the event of liquidation. However, the disadvantages are also highlighted, such as debenture holders receiving a fixed interest rate regardless of the company's profits, having no voting rights, and being unable to participate in the company's activities. The risks associated with issuing debentures are also discussed, including the obligation to pay interest regardless of the company's financial status and the restrictions on further issuance of debentures. The speaker concludes by emphasizing the importance of understanding these aspects for effective financial management.

Keywords

💡Debentures

Debentures are a type of debt instrument issued by a company to raise capital. They are essentially loans that the company promises to repay with interest. In the script, debentures are described as a 'document' and 'debt paper' certified by the government, indicating their formal and regulated nature. The video emphasizes that debentures are safe to buy and that debenture holders have a claim on the company's assets in case of liquidation.

💡Equity Shares

Equity shares represent ownership in a company and are mentioned in contrast to debentures. While debentures are debt instruments, equity shares are a form of equity where shareholders own a portion of the company and have voting rights. The script discusses how debentures differ from equity shares in terms of risk and return, with equity shareholders bearing more risk but potentially receiving higher returns.

💡Secured Debentures

Secured debentures are a type of debenture where the debt is backed by collateral, usually the company's assets. If the company fails to meet its obligations, the holders of secured debentures have the right to claim the collateral. The script explains that secured debentures are safer for investors because they have a right to the company's assets in case of liquidation.

💡Unsecured Debentures

Unsecured debentures, as mentioned in the script, are debentures that are not backed by any collateral. This means that if the company goes into liquidation, unsecured debenture holders do not have a claim on specific assets and are paid only after all secured debts are settled. This type of debenture carries a higher risk for investors compared to secured debentures.

💡Redeemable Debentures

Redeemable debentures are those that can be repaid by the company after a certain period, as explained in the script. This feature allows the company to manage its debt over time and provides a clear repayment schedule for investors. Redeemable debentures offer a maturity date, which is not the case with irredeemable debentures.

💡Irredeemable Debentures

Irredeemable debentures, as discussed in the script, are those that do not have a maturity date and are not repayable at the issuer's discretion. They remain in the company's debt until the company is wound up. This type of debenture is less common and represents a perpetual debt obligation for the company.

💡Convertible Debentures

Convertible debentures are a type of debenture that can be converted into equity shares of the company. This feature gives the holder the option to convert their debt into ownership, potentially benefiting from the company's growth. The script mentions that this conversion can be either fully or partially, depending on the terms set at the time of issuance.

💡Maturity Period

The maturity period of a debenture refers to the time after which the company is obligated to repay the principal amount to the debenture holder. The script highlights that debentures typically have a long maturity period, often 10 to 20 years, providing long-term financing for the company and a long-term investment for the holder.

💡Residual Claims

Residual claims refer to the order in which claims are settled upon the liquidation of a company. The script explains that debenture holders have a residual claim on the company's assets and are paid before preference shareholders and equity shareholders. This ensures that debenture holders receive their principal and interest before other shareholders receive dividends or asset distributions.

💡Fixed Rate of Interest

A fixed rate of interest is a set interest rate that the company agrees to pay to the debenture holders, regardless of the company's profitability. The script mentions that debenture holders receive a fixed rate of interest, which provides them with a predictable income stream but does not allow them to benefit from any potential increase in the company's profits.

💡Voting Rights

Voting rights are the rights of shareholders to participate in the decision-making process of the company. The script clarifies that debenture holders, as creditors, do not have voting rights. This means they cannot influence the company's management or strategic decisions, which are reserved for equity shareholders.

Highlights

Debentures are a type of debt paper issued by companies, providing a fixed rate of interest to the holders.

Debentures are certified by the government, ensuring their safety for investors.

Companies typically issue a limited number of debentures due to restrictions and the obligation to repay.

Debenture holders are paid interest first, even before preference shareholders, highlighting their priority.

In the event of liquidation, debenture holders are paid off before preference and equity shareholders.

Debentures can be secured or unsecured, with secured debentures having a claim on company assets.

Redeemable debentures can be redeemed after a certain period, unlike irredeemable debentures which remain with the company.

Guaranteed debentures offer additional security, with guarantees from banks or regulatory bodies like SEBI.

Convertible debentures can be converted into equity shares, providing an opportunity for debt holders to become equity holders.

Debentures have a long maturity period, often ranging from 10 to 20 years.

Debenture holders do not have voting rights, as their investment is considered a debt, not equity.

Debentures provide a fixed rate of interest, which is decided at the time of issuance.

Companies can deduct the interest paid on debentures from their taxable income, providing a tax advantage.

Debenture holders are protected as they are paid first in case of company profits or liquidation.

Debentures are a long-term source of finance, providing stability for companies.

Debenture holders face the disadvantage of receiving only a fixed interest rate, regardless of company profits.

There are restrictions on issuing additional debentures, which can limit a company's financial flexibility.

The cost of issuing debentures is typically higher than equity shares, impacting the company's cost of capital.

Transcripts

hello dear students welcome to devika's

Commerce and management Academy we have

seen Equity shares and preferentiates in

depth now today we'll talk and we'll

discuss in detail about debentures

the benches is a document

certified documents it's a debt paper

and it is a certified by the government

also the B is regularizing this

debenture so it is always safe to buy

the debentures but issue of debentures

will be always less

most of the companies they issue very

less debentures and if they wanted to

issue further debentures also there is a

restriction

so because it's a debt company has to

pay at any cost main thing is that

whenever you are purchasing debentures

means you'll be getting a particular

interest

as per the decision some interest will

be getting at any cost these debenture

holders has to get the interest

number one point second point is that

whenever companies under liquidation

at that period first the debenture

holders investment has to be paid off

because it's a debt

they are just like creditors for the

organization so these are the main two

points you have to remember debentures

means it's a document

so it's a certificate given by the

company with the steel

they are just like creditors it's a debt

for the organization they have to get

the interest

and their principle will be always safe

now we'll talk about first two types of

debentures there are different types of

debentures then after that we'll see the

features advantage and disadvantages

you'll get full clarity just focus

now types of debentures if you see there

are total six types of debentures first

thing is that secured debentures secure

debentures means these people debentures

are always secured over the assets if at

all companies having lots of huge losses

companies in under liquidation

in such cases on company assets assets

and Company assets these people are

having the right

these people are having the right that

is what we say to the secured secure

debenture

second one is unsecured opposite to this

there's no security on the assets

the ventures you may buy

but if compared under loss company is

going to shut down or winding up on

assets these debenture holders does not

have any kind of security

the recipient unsecured debentures

secured debentures unsecured benches

easy to remember next redeemable

irreadable

redeemable irredeemable these two we

have already studied in the preference

here

same way redeemable

these debentures after certain period it

can be redeemed

it can be given off it can be matured

okay so redeemable debentures whereas

irredeemable there is no redeemable tea

there is no read with redeemability that

debentures especially this irradiable

debentures it will be in the company

itself only till the last existence

till the winding up

the debentures will be always on the

company itself only irritable

next one guaranteed debentures there are

some debentures where these debentures

holders are getting guarantee

now guarantee not only from the company

guarantee from the banks

and guarantee from the sebi so this kind

of security they are getting

that is if we say it as a guaranteed

debentures

there is convertible debentures last one

convertible debentures means these

debentures can be convertible into

Equity shares

very rarely this happens as same point

we have discussed even in preference

shares also preference shares can be

convertible into Equity shares now here

debentures can be convertible into

Equity shares but this convertibility

can be fully convertible debentures are

partially partially convertible

debentures fully means total

partially half whatever it may be

decided already as per the purchasing of

the nature of the convertible debentures

according to that they can go for fully

or partially

okay so these are the six types of

debentures if you understand these types

of debentures now let's see the uh being

features main features is first thing is

that maturity period

most of the time debentures are long

term debentures long term Finance

it will be more than 10 to 20 years it

will be around the period of 10 to

20 years minimum

means long term

10 to 20 years these debentures will be

in the organization itself only so need

not to worry

so that is maturity period is very long

and whereas residual claims in income

whenever company gets the profits first

preference will be given to the

debenture holders to get their interest

very important Point remember company

God suppose the example company got

around say three crores of profit

this is the profit for the company out

of this first preference

will be given to the debenture holders

debenture holders to get the interest

pay them off first

pay them interest first then after that

next preference will be given to the

preference shareholders

what do they get dividend

and still anything is left

whatever is left then

that goes to the that dividend goes to

the

Equity shareholders

Equity shareholders also dividend they

are going to get

so first preference is for the debenture

holders first then preference than

equilateralist this you must remember

okay so that's about residual claims in

income

company gets a profit these people are

going to get the first

interest

in the same way residual claims on

assets if the company is in Winding up

shutdown company wants to shut down

or

liquidation time also company assets

they'll be selling

so at that period also first payment

will be given to the debenture holders

what do they get they get the investment

amount first whatever they have invested

say I have invested one lakh rupee on my

debentures whenever company gets profit

first interest will be given to me

if companies under winding up at that

period also first

payment that one lakh rupee I'm going to

get then after that next preference will

be given to the preference shareholders

then last Equity shareholders

getting it this is residual claims on

assets this is this happens only at the

time of winding up next one no voting

rights debenture holders are just like

credit cards to the organization it's a

debt for the organization where is the

question of giving them voting rights no

thing

they'll be getting their interest that's

it nothing to do with the organization

activities no voting and lastly fixed

rate of interest debenture holders

always they get a fixed rate of interest

it will be decided 12 percent yes 12

percent only will pay not more than that

external we won't pay

and these are the main features of the

debentures now if you understand the

types of debentures features then it's

very easy to understand advantages and

disadvantages shall we go yes

advantages main thing is that long-term

source

as I said it is 10 to 20 years minimum

long-term Source company need not to

worry about the funds once they have

issued debentures means it will be in

the organization for long period it will

exist

so it's a long-term source and fixed

rate of interest we have to be need not

to worry whatever we have decided that

only we have to pay we not we we have to

focus only on that interest rate that we

will pay so that's that's the advantage

and income tax deduction very important

advantage

whenever companies having debenture

holders for them they are paying

interest

whenever they are paying the interest on

interest income tax benefit is there

deduction totally it is Exempted

so company need not to pay anything this

is one of the best and the good

advantage last one protection

debenture holders please remember

debenture holders are the uh

debt for the organization debt for the

organization whenever company gets less

profits also first interest to be paid

to the debenture holders

companies closing off

winding up still their investment

debentures investment that is to be paid

to the first debenture holder

so protection and not only this

and the company steeled that paper will

be given to the debenture holders it's a

document debenture the princess is a

document and this is certified by the

sebi guaranteed by the Sabi what else is

required fully secured protection is

there okay so these are the advantages

there are few disadvantages once the

first thing is that fixed rate of

interest debenture holders point of view

they get only fixed rate of interest not

more than that if company is under huge

profits

huge profits but they get only the fixed

rate of interest

huge profits means first they'll get the

interest rate the next one next

preference shareholders also fixed

interest rate they'll be given and rest

of everything goes to the equity

shareholders they will be getting the

lots of benefit but debenture holders no

they get only fixed the interest only

though the company is under huge profits

one disadvantage and no voting rights

they can't be part and parcel of the

organization they can't participate in

voting rights they don't have voting

rights they can they can't participate

they can't interfere in the

organizational activities because they

are the outsider

their creditors it's a debt for the

organization who will allow them to

interfere in the organization no

so no voting rights no participation

next creators of the company they are

the creditors of the company Outsiders

of the company no interference and it's

high risk sometimes

you know that organization we may gets

lots of losses also fluctuations will be

there sometimes profit sometimes losses

though we are under loss we have to pay

the interest to the debenture holders

it's high risk once if you have issued

debentures means you can't take it back

you can't take it back you have to pay

the interest whether you are under

profits or locks

so that is why this is always high risk

burden and a restriction for further

issues company cannot issue

easily further debentures

the Vintage they wanted to issue more no

they can't issue there is a restriction

once if you have issued that's it and

once again if you wanted to achieve more

debentures because there is a

restriction there are some formalities

because debentures are always risk for

the organization

and this cost of debentures also always

higher than the equity shares and also

preferentiates

am I clear

first take the screenshot

I was getting cuffed so I told you to

take the screenshot I may clear about

this topic

so understood types of debentures

features Advantage disadvantages now you

got a full clarity about the benches

what is debentures what types of

debentures are there how it is going to

affect the organization it's a long term

that

it will be in the organization they

don't have rights like all these things

you learned am I clear next class will

see another important topic related to

the financial management only by the way

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