Corporate Debentures

Corporate debentures are normally backed by the reputation and general creditworthiness of the issuing company. Corporations occasionally issue this type of debt securities in order to raise capital and like bonds, the debentures too, are documented as indentures. It is a type of debt instrument that is not covered by the security of physical assets or collateral. Debentures are a method of raising credit for the company and although the money thus raised is considered a part of the company's capital structure, it is not part of the share capital.

A growing company has a steady requirement of funds to finance its growth programs over a period of time. For this the company does not depend on any one source to raise its capital from, and therefore we have companies either going for institutional credit or bank loans, or approaching the capital market. It has been noticed that institutional credit is accessed by companies usually in controlled economies where the capital markets are not well developed. As with all other forms of credit available in the capital market the debentures too entail a fair amount of transparency and accountability on the part of the issuing company. One of the most familiar types of debentures issued by the companies is the convertible debenture which allows a debenture holder the option to convert his debentures into shares of the same company after a specified time. For instance, a particular debenture may allow more than one stage of conversion by allowing the debenture holders to convert their debentures into shares of the same company in specific lots in 2 or three different stages. In most cases it is a confident approach that is taken by many companies that are well established and have been performing consistently well over a long period of time.

The main difference between debentures and bonds is that debentures have no collateral and normally carry a higher level of risk. It has been observed that bond buyers generally purchase debentures on the belief that the bond issuer would not default on the repayment.

In the case of a debenture the company is liable to pay a specified amount with interest indicating the fact that it has similarities with a certificate of loan or a loan bond. In other words a debenture is an instrument of debt executed by a company acknowledging its obligation to repay the borrowed sum at an agreed rate of interest.