24. Detailed Information On Debentures from Financial Management Subject
Summary
TLDRIn 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
📜 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.
🔑 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.
🌟 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.
Mindmap
Keywords
💡Debentures
💡Equity Shares
💡Secured Debentures
💡Unsecured Debentures
💡Redeemable Debentures
💡Irredeemable Debentures
💡Convertible Debentures
💡Maturity Period
💡Residual Claims
💡Fixed Rate of Interest
💡Voting Rights
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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