## Debentures
### Definition
Debt instruments issued by companies to raise long-term funds from public or through private placement. Repayable after a fixed period at a fixed interest rate.
### Key Features
| Feature | Detail |
|---|---|
| Interest-bearing | Fixed interest paid regardless of profits; tax-deductible |
| Maturity | Generally 3–10 years (extendable for high gestation projects) |
| Security | Secured (mortgage on assets) or unsecured (naked/simple) |
| Credit rating | Mandatory from CRISIL, ICRA, CARE before public issue |
| Tradability | May be listed; freely transferable if listed |
### Types of Debentures
A. By Convertibility:
| Type | Feature |
|---|---|
| Non-Convertible (NCD) | Repaid fully in cash at maturity |
| Fully Convertible (FCD) | Entire value converts into equity at pre-defined terms |
| Partly Convertible (PCD) | Split: one part converts to equity, rest repaid in cash |
B. Other Types:
| Type | Feature |
|---|---|
| Bearer | Transferable like negotiable instruments; interest to holder |
| Registered | Interest paid only to registered holder |
| Mortgage | Secured by charge on company assets |
| Naked/Simple | Unsecured; no charge on assets |
| Redeemable | Repaid after fixed period |
| Non-Redeemable | Not repayable during company's lifetime (rare today) |
### Advantages
1. Lower cost — interest is tax-deductible → effective cost less than equity
2. No dilution of ownership — debenture holders have no voting rights
### Disadvantages
1. Mandatory interest — must be paid even in loss years → financial risk
2. Security requirement — secured debentures create a charge on assets
3. Credit rating burden — involves cost and scrutiny