SATURDAY, APRIL 20, 2024
Neetant D Sinai Shirodkar
In times of such economic slowdown where uncertainty looms large, investment in shares and securities carries high percentage of risk. There is the need to investment in alternate corporate instruments where returns are assured and capital invested is secure. One such avenue is investing in Corporate Debentures. My column today highlights the features of this form of investment and should orient readers to make an informed decision.
What is a Debenture?
A Debenture is a marketable security (a type of investment) issued by a company to raise money for long-term activities and growth. It is a form of debt capital, so it is accounted for as debt (liability) on the balance sheet of the issuing company.It is a legal certificate that says how much money the investor gave (principal), the interest rate to be paid and the schedule of payments. Investors usually receive their principal back when the debenture matures (ie, at the end of its term). Bonds are similar, but unlike bonds, debentures are unsecured ie, investors have no claim to the assets of the company if default occurs. Because repayment is based solely on the creditworthiness of the issuing company.
Convertible V/s non-Convertible debentures
Convertible debentures can be converted into equity shares of the issuing company after a predetermined period. They are more attractive to investors since theycan convert into sharesand attractive to companies since they typically have lower interest rates than non-convertible debentures.
Non-Convertible Debentures: As the name suggests such debentures do not have an option to be converted to shares or any kind of equity. These debentures will remain so till their maturity, no conversion will take place. Since they are not able to convert, they usually carry higher interest rates than convertible debentures.
More about Debentures.
Debentures are instruments of debt, which means that debenture holders become creditors of the company. A debenture certificate comes with the date of redemption and amount of repayment mentioned on it. This certificate is issued under the company seal and is known as a Debenture Deed.The interest rate or the coupon rate is fixed and is payable yearly or half-yearly. Unlike equity shareholders there are no voting rights for debenture holders as they are creditors of the company and the interest payable is a charge against the profits of the company. So, these payments must be made even in case of a loss.
What’s in it for the issuer?
One of the biggest advantages of debentures is that the company can get its required funds without diluting equity. Since debentures are a form of debt, the equity of the company remains unchanged. Since Interest paid on debentures is a charge against profit for the company, it is a tax-deductible expense and is useful while tax planning for the corporates. However, as mentioned above it is important to bear in mind that interest is payable even in the event of a loss.
Taxation of Debentures in the hands of the investor
Interest Income from debentures is taxable under the head ‘Income from Other Sources’. It is taxed at slab rates applicable to the investor. The taxation of any profits made either at the time of sale or redemption of debentures will vary depending on the period for which such debentures have been held by you. ie Long-Term Capital Gain or Short-Term Capital Gain. Refer table given below:
Can You Invest in Debentures and is it Safe to do So?
In recent years, investing in debentures has grown in popularity. Although no investment is free of risk, debentures are more secure than investing in stocks, simply because you are guaranteed payments with good interest rates until the maturity period is up. So, the next time you think of investing in corporate instruments keep debentures in mind.
