What is a debenture?
Debentures are debt instruments issued by a joint stock company. Amounts collected by way of debentures form part of the loan capital of a company. They are repayable after a fixed period. Debenture holders get interest on their debentures. They are creditors of the company. They do not get dividend.
What are bonus debentures?
A bonus debenture is a free debt instrument issued to a company’s shareholders as a reward. When the company declares a bonus debenture, you will receive bonds from the company for a specific face value. Interest will be paid on these debentures every year. They will be redeemed after a specific period, when you will receive a lump-sum payment.
Why are bonus debentures important?
Bonus debentures serve many purposes.
The debentures are redeemed after many years, the company will not see its reserves deplete drastically at one go as is the case with bonus shares. The company will be able to hold on to them for expansion projects.
it manages to ‘borrow’ from shareholders at lower rates.
The interest paid is claimed as an expense and tax incidence will reduce. Shareholders get free interest-earning bonds.
The debentures are fully secured.
Companies can also list the debentures on the exchanges and you can sell them in the markets if you need cash.
Unlike bonus shares, a bonus debenture issue does not increase the equity share base, which dents the earnings per share. They do not squeeze return on equity, or bump up valuations.