Navigating Financial Waters - Raising Funds Through Debentures

Introduction:

In the intricate realm of corporate finance, businesses often seek diverse avenues to secure funds for growth, expansion, or strategic initiatives. One such avenue that has gained prominence is the issuance of debentures. This article delves into the intricacies of raising funds through debentures, exploring what they are, how they work, and the advantages they offer to both businesses and investors.

Understanding Debentures:

Debentures are debt instruments issued by corporations to raise capital from the market. Essentially, they represent a promise to repay the borrowed amount along with periodic interest to the debenture holders. Unlike equity, debenture holders do not have ownership rights in the company; instead, they are creditors with a claim on the company's assets.

Types of Debentures:

1. Secured Debentures: Backed by specific assets of the company, providing a safety net for investors.
2. Unsecured Debentures (or Naked Debentures):** Issued without any specific collateral, relying solely on the company's creditworthiness.
3. Convertible Debentures: Can be converted into equity shares after a predetermined period, offering a unique blend of debt and equity features.
4. Non-Convertible Debentures: Cannot be converted into equity, serving purely as debt instruments.

Advantages of Raising Funds through Debentures:

1. Lower Cost of Capital: Debentures often have a lower cost of capital compared to equity, as interest payments are tax-deductible, making them an attractive financing option.
2. Flexibility in Terms: Issuers have the flexibility to structure debentures with various terms, such as maturity periods, interest rates, and conversion features, catering to specific financial needs.
3. No Dilution of Ownership: Unlike equity, issuing debentures does not result in dilution of ownership or control, allowing existing shareholders to retain their proportional stake in the company.
4. Diverse Investor Base: Debentures attract a diverse pool of investors, including institutional investors, retail investors, and even other corporate entities, contributing to a well-rounded and stable funding base.

Issuance Process:

• Assessment of Funding Needs: Companies first evaluate their funding requirements and financial health to determine the appropriate amount and type of debentures to issue.
• Terms and Conditions: Issuers set the terms of the debenture, including interest rates, maturity dates, and any conversion features, keeping in mind market conditions and investor preferences.
• Regulatory Compliance: Strict adherence to regulatory requirements, including obtaining necessary approvals from regulatory bodies like the Securities and Exchange Board of India (SEBI) in the case of Indian companies.
• Market Placement: Debentures are then offered to the public or specific investors through various channels, such as private placements or public issuances.

Debenture Trustee:

A debenture trustee is a SEBI Registered Market Intermediary, appointed to safeguard the interests of debenture holders and hold the security in Trust. They ensure that the issuer of debentures complies with the terms and conditions outlined in the debenture trust deed. Additionally, Debenture Trustees act as intermediaries between the issuer and debenture holders.

Solutions Provided by Axis Trustee as Debenture Trustee:

• Advising security creation and related documentation
• End to end services, including assistance in DLT updation & Listing
• Documentation, Due Diligence & Security creation
• Monitoring of various covenants
• Dissemination of info & operational services (NOC, Amendments etc)
• Enforcement of security
• Managing enforcement proceeds
• Regulatory Compliance & Monitoring

Conclusion:

Raising funds through debentures provides businesses with a strategic and versatile financing option. By understanding the nuances of debentures, companies can access capital while maintaining financial flexibility and optimizing their capital structure. Investors, in turn, gain the opportunity to diversify their portfolios with fixed-income securities, contributing to a balanced and well-managed investment strategy. As the financial landscape continues to evolve, debentures stand as a reliable bridge connecting corporate financing needs with investor preferences.