Debentures | Importance & Role in Company capital structure
Importance of debentures and bonds in the capital structure of a company is very significant particularly due to the following reasons:
Importance of Debentures:
1. Debentures holders or suppliers of loan capital have no controlling interest in the company.
2. Finance is available for a fixed period with certainly and thus the company can adjust its investment plans suitably by taking into account the funds available.
3. Debentures enhances the earnings of equity holders through the operation of financial leverage.
4. In depressed market conditions debentures plays an important role in providing a good source of finance for a company and is beneficial to the investors.
5. Debentures provides long-term finance to company on easy and cheap terms. The cost of debt is lower than cost of equity or preference shares as interest is tax deductible.
6. Debenture help in mobilization of savings from public particularly from those investors who are risk aversive.
Important role of Debentures as a source of finance:
Debentures as a source of finance suit companies which have regular earnings to service the debt, have higher proportion of fixed assets in their assets structure which offers adequate security and motivates investors. The company has to ensure maintenance of prudent debt equity ratio.
Recent trend in the issue of debentures has been quite encouraging and important because of the following factors viz.
1. Support from investment institutions is adequately available. LIC, UTI, GIC and others have been in field to invest public funds in the debenture issues;
2. Emergence of institutions acting as trustees for debentures holders have reposed confidence in the investing public for the security of their money and safeguard of their interest as creditors;
3. Institutional underwriters, merchant banks in public and private sector have come up to render successful underwriting services to the investor as well as the needy companies;
4. Investors preference to high yielding securities with minimum risk has encouraged issue of debentures by the companies.
5. Cost of raising money through debenture is minimum as against the cost involved in other sources of finance;
6. Debenture issuing company is obliged now to create a debenture redemption fund to protect the interest of debenture holders.