IMPORTANCE OF DEBENTURES AS A SOURCE OF FINANCE
Debentures are a type of debt instrument used by companies to raise funds from the market. They offer a fixed rate of return to investors and are generally considered a safer investment option compared to equities. Here are some reasons why debentures are an important source of finance:
- Lower cost of capital: Debentures are a cheaper source of finance compared to equity as they offer a fixed rate of interest to investors. This is because debentures are considered less risky than equity investments, which are subject to market fluctuations.
- Flexibility in repayment: Debentures offer greater flexibility in repayment compared to bank loans. Companies can choose the repayment period and interest rate, which can be fixed or floating.
- Diversification of funding sources: Debentures provide companies with an additional source of funding, which helps them diversify their funding sources. This reduces their dependence on bank loans and equity investments.
- No dilution of ownership: Unlike equity, debentures do not dilute the ownership of the company. This means that the existing shareholders do not lose their ownership rights when a company issues debentures.
- Tax benefits: Interest paid on debentures is tax-deductible, which reduces the tax liability of the company. This makes debentures a more attractive option for companies looking to reduce their tax burden.
In summary, debentures are an important source of finance for companies as they offer a cheaper and more flexible funding option compared to equity and bank loans. They also help companies diversify their funding sources, provide tax benefits, and do not dilute the ownership of the company.
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