Know what is Debenture and Benefit of buying debentures

what is debenture?

Nowadays, Commercial banks of Nepal are issuing debenture one after one providing interest equal to fixed deposit or more annually. In this articles we will make you know what is Debenture and benefit of  buying debentures.

Debenture is debt instrument issued by reputed company or corporation. Debentures are the form of long term loan taken from public & other organizations by corporation or company to fulfill financial needs.

It is not secured by collateral, people buy debenture based on reputation & creditworthiness of issuer Company. Buyer purchases debenture based on the belief of issuer will have no default of repayment.

Debentures are repayable at the fixed period of time & pay fixed rate of interest annually or semiannually. Issuer Company must pay debenture holder fixed rate of interest upto maturity period. After maturity, issuer must pay back whole amount for debenture holders.

It is better option to buy debentures for those investor who don’t want to take more risk investing in equity shares because it provides constant interest rate for specific period of time.

Par or face value of debenture is Rs. 1000. Buying 1 unit of debenture means you have given Rs.1000 loan for the issuing company. For that you will get interest for specific period of time & at the end of issuer will pay back whole amount.

Debentures are of two types, Convertible and Nonconvertible

Convertible debentures are debenture which will be converted into equity shares of issuing company after specific period of time. Basically low interest is given due to convertibility to equity shares. It is most attractive for both investors & company.

Non convertible debentures are debenture which cannot be converted into equity shares. It is regular types of debenture and pay high interest than convertible debenture.

Benefits of Buying Debentures

  • Debentures holders will get fixed rate of interest for fixed period of time and after maturity whole amount.
  • Change in interest rate of saving and fixed deposit do not harms debenture holders, as interest rate of debenture will be unchanged.
  • Debenture holders will get interest before dividend payment for equity shareholders.
  • Even in liquidation of the Company, debenture holders will be pay first.
  • Buyers can take loan keeping Debenture as collateral.
  • Debenture can be sale as shares if needed.

Debenture issuing process is same as initial public offering (IPO). Both the company & investor follow same steps as in primary market to buy debenture. Interest people can apply for debenture exactly like apply for IPO/FPO, can apply from all the C-ASBA approved Banks & financial institutions.

Banks are issuing Debenture majorly due to financial difficulty. As per NRB banks must maintain Credit to Deposit ratio at 80% which means bank cannot lends more than 80% of Deposit. As per Q1 report of banks, CCD ratio of most of banks stands nearly 80% which means they don’t have fund for lending. Due to such condition, banks are issuing debenture giving interest more than 10% annually.