What Is Debenture Capital?

Esther Ejim

In order to understand what a debenture capital is, it is necessary to understand the meaning of a debenture instrument. A company or government entity looking for a means of getting the financing it needs to function has several options that include borrowing money from a bank or issuing shares to the general public in exchange for cash, with the understanding that the company will pay dividends to such investors according to its performance. In other words, the shareholders will only receive any appreciable dividends if the company makes profits. Alternatively, such a company could issue debenture to certain entities with some basic understanding in exchange for cash, which the company would use for its operations.

A mortgage debenture is generally demanded by a bank that is giving a loan to a business.
A mortgage debenture is generally demanded by a bank that is giving a loan to a business.

In this sense, the cash flowing from the act of issuing the debenture by the company is called a debenture capital and is different from any other capital in certain unique ways. One of the ways in which a debenture capital differs from items like bank loans is the fact that the remittance of the debenture capital is not hinged on the provision of any type of capital on the part of the company. In such transactions all the company requires is a sterling reputation in the business community, which means that the debenture capital may be described as a sort of unsecured loan. This means that only companies with proven track records or government arms will qualify for such a means of raising capital.

Also worthy of noting in the remittance of this type of capital is the fact that the company benefiting from the debenture capital will be the one to originate the debenture. This is basically a formal legal acknowledgement that the company owes the debenture holder the obligation of repaying the debenture capital at a certain date and under the conditions attached to the repayment. The entity granting the capital to the company will be the one to hold such a debenture, and the company issuing the document will usually pay the holder of the debenture an agreed amount of permanently fixed interest on the sum of the capital over the life or duration of the debenture capital, which will expire once the final sum has been paid. Interest paid by the company to the holder of the instrument is usually the profit that the holder gains from a transaction with the company.

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