Bond vs Debenture

Financial Crisis can come in any form and the person who is prepared in advance can fight with this crisis. To avoid these unforeseen financial crises everyone invests in different instrument that can generate returns on the income. There are many options available in the market that can be classified as risky and non risky. It is very well understood that risky instruments fetch high instruments and the non risky ones can give low returns.

Here, Debentures and bonds are two such options that can give good returns on the investment. Debenture is an instrument issued by a company that is generally in the form of convertible or non convertible into equities. Bonds are either issued by companies or by governmentand can be seen as a loan taken by them to meet their financial needs. These two instruments are basically loan taken from the investor but the repayment scenarios are generally different.

Debentures

Debentures come from a latin word called ‘debre’ meaning ‘to borrow’. Debentures are loans to the company. The companies issue debentures which are coveting expansion and can build sustenance in the business in the medium to long term. Just like equities these can be transferred to anyone, but does not have voting rights in the company’s general meetings. Debentures are simply loans taken by the companies and do not provide the ownership in the company. Debentures are of two types convertible and nonconvertible. The convertible debentures are the ones that can be converted into equity shares at a later time. This convertibility provides attraction to the investor but yield lower interest rates. Non convertible debentures does not convert into equity shares thus can yield a higher interest rate.

Debenture holders may be secured or unsecured, the holder of an unsecured debenture is an unsecured creditor. Like any other unsecured creditor, he has two remedies:

• He may sue for the principal and interest and execute the decree against the property of the company.
• He may present a petition for the winding up of the company under section 433 of the act, on the ground that the company is not able pay its debts.

If the company is already in the course of winding up, he may prove in such winding up the amount due to him like any other unsecured creditor. Whereas, a secured debenture holder stands in a stronger position as compared to unsecured debenture holder . In addition to the above two remedies available to the unsecured debenture holder, he can exercise the following remedies.

• Sale : he will have an express or implied power of sale.
• Debenture holders action : when a company commits a default in payment of debts, a debenture holder may bring a suit against the company to obtain payment and to enforce the security.
• Appointment of receiver: the debenture holders may appoint a receiver here termed as ‘Debenture Trustee’ to take charge of the assets
• Valuation of security and proof of balance : if the company is being wound up and his security is insufficient, the debenture holder may value his security and prove for the balance of his debt or give up his security and prove for the whole debt.

Bonds

Bonds are actual contract notes issued by the borrower (here company or government) to pay interest at regular intervals and return the principal on the maturity of the bond. These bonds are issued by the companies for future expansions. The bonds are also issued by the government for its expenses. A bond is seen as loan taken by a borrower from the investor so unlike equity share it does not give stake in the company but he is seen as a lender. These bonds are redeemed at a definite time. These are secured loans and can yield low to medium interest rate.

Debenture holders get periodical interest on their money and upon completion of the term they get their principal amount back.Bond holders do not receive periodical payments. Rather, they get principal plus interest accrued upon the completion of the term. They are much more secure than debentures and are issued mostly by government firms.

In Brief:

• Debentures have a charge on the assets of the company which is not envitable in the case of Bonds as held in the case of Laxman Bharamji v. Emperor.

• Unsecured Debentures are like unsecured loans which carries a higher rate of interest.

• Debenture holders get periodical interest whereas bond holders receive accrued payment upon completion of the term.

• Bonds are more secure as they are mostly issued by government firms in comparison to Debentures since the latter is issued by a company.