A debenture is a document issued by the company as evidence of its debt. It is an acknowledgement of the company indebtedness to its holders. Issue of debentures is the most popular way of borrowing by companies and this way it constitutes the major loan capital of a company. A debenture is known as a bond which cannot be secured by any collateral or asset security. These are of long term periods and its holder has the option to exchange his or her debentures for stocks of the same issuing company. Debenture holders are the creditors of a company and therefore they are entitled to get interest every year and when the dentures are secured, they are paid on a priority in comparison to all other creditors. The debentures are generally given a floating charge over the assets of the company whereas all companies cannot issue debentures.
Debentures are of following types –
1. Registered Debentures
2. Unregistered (or bearer) Debentures
3. Secured (or mortgaged) Debentures
4. Unsecured (or simple) Debentures
5. Redeemable Debentures
6. Irredeemable (or perpetual) Debentures
7. Convertible Debentures
8. Non-convertible Debentures
Here, we will discuss only the last two type of debentures.
(A) Convertible Debenture–Debentures that can be wholly or partly converted into equity shares on a fixed date or after a lapse of some time. These types of debentures carry a lower interest rate when compared to non-convertible debentures. Companies issue these debentures with a view to attract investors. These debentures provide a privilege to a debenture holder to change his status from a creditor to an owner. Moreover, an investor gets the benefit of an assured annual income without taking any immediate risk.
(B) Non-convertible Debenture–All debentures are non-convertible unless the holders of these get the option for conversion. These are the type of debentures which cannot be converted into stocks of the company. These types of debentures carry a higher interest rate when compared to convertible debentures.
It refers to the account where the money is deposited for a fixed period and the same cannot be withdrawn before the expiry of the contract period and these deposits can be held either with a bank or a company. Depositors invest money in such an account with a view to earn high returns. Customers can withdraw the deposit before the maturity date but only in case of emergency by foregoing certain amount of interest. It is also called as an arrangement with any financial institution or a business entity where the customer invests a certain fixed amount of money for a certain fixed duration of time and in return gets a regular interest that is made on a periodic basis. This period usually varies from three months to seven years or even more. Interest on fixed deposits is generally much higher than the interest on savings deposit. Higher the period of deposit, higher is the rate of interest. There is no high level risk is involved due to the amount of interest is fixed and does not fluctuate with market conditions but the Reserve Bank of India controls the rate of interest.
Difference between Non-convertible Debenture and Fixed Deposit
1.Non-convertible debentures are the borrowed funds for the companies and investment by the holders whereas fixed deposits are made to financial institution to gain interest of money.
2. There are no restrictions on the issue of non-convertible debentures as holders can buy any number of them as specified in the terms and conditions while fixed deposits are the investment accounted in the mode of invested money.
3. Non-convertible debentures offer higher returns than fixed deposits.
4. Non-convertible debentures are listed on the stock exchange whereas fixed deposits are issued by banks to its customers via information leaflets.
5. Non-convertible debentures are not subject to tax deducted at source unlike fixed deposit interest which is taxable.
6. Non-convertible debentures are secured by the assets of the company while fixed deposits do not need any assets or collateral security.
7. Non-convertible debentures are more liquid in nature when compared to fixed deposits.
8. A customer cannot take a loan against the non-convertible debenture certificate unlike in the case of fixed deposits a customer can take a loan against the fixed deposit certificate.
9. In the case of fixed deposits the rate of interest increases with the period of deposit which is absent in the nature of non-convertible debentures.
10. Banks allow a higher rate of interest to attract lump sum fixed deposits from its customers while companies allow a certain rate of interest while issuing non-convertible debentures.
11. All companies cannot issue non-convertible debentures whereas in the case of fixed deposits, all banking & other financial institutions can attract fixed investments.
12. Companies can issue non-convertible debentures provided they have the borrowing power which is not the same in case of fixed deposits because depositors invest money in fixed deposit account with a view to earn high returns.