What is a 'Debenture'

What is a 'Debenture'

A debenture is debt instrument which is used by  companies to borrow money, at a fixed rate of interest. This is not secured by physical assets or collateral. In legal term this is  a document that either creates a debt or acknowledges it.

Debentures are generally freely transferable by the debenture holder. Debenture holders have no rights to vote in the company's general meetings of shareholders, but they may have separate meetings or votes .

Basically this is two type:

1.      Convertible Debentures

2.       Non-Convertible Debentures

a.      Secured

b.      Unsecured

 Convertible debentures are bonds that can convert into equity shares of the issuing corporation after a specific period of time.

Non-convertible debentures are regular debentures that cannot be converted into equity of the issuing corporation. To compensate, investors are rewarded with a higher interest rate when compared to convertible debentures.

 Convertible debentures are the most attractive to investors because of the ability to convert to share .

For Example : Company ABC wants to raise the fund(money)form public then it issues a dept paper for a specified  time where it pays a interest rate on the investment. This dept paper is known as debenture.Compnay  ABC can issue a two type of debenture Convertible/ Non-Convertible Debentures.