If a company needs funds for extension and development purpose without increasing its share capital, it can borrow from the general public

Such a loan certificate is called a debenture. Debentures are offered to the by issuing certificates for a fixed period of time and at a fixed rate of interest.

public for subscrip-tion in the same way as for issue of equity shares. Debenture is issued under the common

seal of the company acknowledging the receipt of money.

Advantage of Debentures: Following are some of the advantages of debentures:

(a) Issue of debenture does not result in dilution of interest of equity shareholders as they do not have right either to vote or take part in the management of the company. (b) Interest on debenture is a tax deductible

expenditure and thus it saves income tax. (c) Cost of debenture is relatively lower than preference shares and equity shares. (d) Issue of debentures is

advantageous during times of inflation. (e) Interest on debenture is payable even if there is a loss, so debenture holders bear no risk.

Disadvantages of Debentures:

Following are the disadvantages of debentures:

(a) Payment of interest on debenture is obligatory and hence it becomes burden if the company incurs loss. (b) Debentures are issued to trade on equity but too much dependence on debentures increases the financial risk of the company. (c) Redemption of debenture involves a larger amount of cash outflow. (d) During depression, the profit of the company goes on declining and it becomes difficult for the company to pay interest.

types of debenture:

1. On point of view of record:

(a) Registered debentures: These debentures are registered with the company and the amount is payable only to those debentures holders whose names are registered with the company.

(b) Bearer debentures: These debentures are not registered with the company, these are transferable merely by delivery and the debenture holder will get the interest.

2. On the basis of security:

(a) Secured or mortgaged debentures: These are secured by a charge on the assets of a company. The principle amount and the unpaid interest could be recovered by the holder out of the assets mortgaged by

the company.

(b) Unsecured debentures: They do not get any security in reference to principal amount or unpaid interest. They are simple debentures.

3. On the basis of Redemption:

(a) Redeemable Debentures: They are issued for a fixed period and the principle amount is paid off only at the expiry of that period or at the maturity.

(b) Non-redeemable debentures: They are matured only after the liquidation or closing down or winding up of the company.

4. On the basis of convertibility:

(a) Convertible debentures: These can be converted to shares after the expiry of the period i.e; on their maturity.

(b) Non -Convertible debentures: These cannot be converted to shares on their maturity.

5. On the basis of priority:

(a) First debentures: These are redeemed before other debentures.

(b) Second debentures: These are redeemed after the redemption of the first debenture.