A Debenture is a bond or a debt instrument that is unsecured by collateral. A debenture has no collateral backing, so the investor must rely on the creditworthiness and reputation of the company. On another hand, it is an instrument used by the government or the companies to issue the loan for a fixed period of time with a certain interest rate.
Normally, companies issue debenture when they need funds for expansion, to purchase expensive machines, or to increase their investment. These days, debenture in Nepal is getting a popular and easy source for companies and the government to collect the fund for their expansion.
So, a debenture is the instrument of the capital market, where a company raises or collects money from the market for a specified period of time with a fixed interest rate. For example; recently in Nepal, NMB Bank is going to sell a bond called ‘NMB Debenture 8.5-2087 / 88’ with an annual interest rate of 8.5 percent. They specified that the debenture will worth Rs 2 billion for 10 years from 16 May 2021.
Debenture provides funds for the company and also loans are not restricted in terms of how much they can borrow. Also, it is profitable to the investor as well because the company pays a good interest rate to the debenture buyer.
Interest rate risk and inflationary risks are the major disadvantages of debenture for lenders however, little financial flexibility because of interest payment compulsory are the main cons to the borrowers. Normally, there are 4 different types of debentures:
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Types of Debentures
There are four different types of debenture which are as given below:
1. Secured and Unsecured Debenture:
Firstly, secured debentures are secured by the company assets. The company gives the investor right to take the principal amount along with the specified interest rate out of the assets mortgaged by the company.
Secondly, an unsecured debenture is unsecured, therefore, the investor has no claim on company assets of principal amount and unpaid interest. This means unsecured debenture does not have any charge over the assets of the company.
2. Registered and Bearer Debenture:
Registered debentures are registered with the company. The interest of debenture will be paid to those person or company name appears in the company’s register. Also, this debenture can be transferred only by the regular instrument. In contrast, bearer debenture is not recorded in the company’s register. Also, this kind of debenture is transferable by mere delivery.
3. Convertible and Non-Convertible Debenture:
The debenture can transfer into the shares after the completion of the pre-decided period. So, all the terms and conditions and conversion ratios are announced in the debenture issue time. However, non-convertible debenture can not transfer into the equity shares.
4. Redeemable and Non-Redeemable Debentures:
Redeemable debentures are issued for a fixed period of time and at the end of the debenture’s maturity period, debenture holders are paid the principal amount. Also, in this kind of debenture, the interest is paid periodically.
Non-redeemable debentures do not have any specific time for re-payment of the debenture’s principal amount. They pay this amount after the liquidation of the company or as per the term of the period specified in the debenture.
Debenture in Nepal
Firstly, the Nepalese capital market is growing rapidly because of the introduction of the different capital market instruments and technological innovation in the capital market as well as improvement in existing technology.
Moreover, debenture is one of the major instruments of the capital market. Nowadays, many companies especially banks are issuing debentures in Nepal. There are some banks who already issued debentures are:
| S.N. | Debenture Name |
| 1 | 10 % NMB Debenture 2085 |
| 2 | 10% Himalayan Bank Debenture 2083 |
| 3 | 10% Nabil Debenture 2082 |
| 4 | 10 % Nepal SBI Bank Debenture 2086 |
| 5 | 10 % Prabhu Bank Debenture 2086 |
| 6 | 10 % Sunrise Debenture 2080 |
| 7 | 10.25 % Citizen Bank Debenture 2086 |
| 8 | 10.25 % Global IME Bank Limited Debenture 2080/81 |
| 9 | 10.25 % KBL Debenture 2086 |
| 10 | 10.25 % NBBL Debenture 2085 |
| 11 | 10.25 % NIC Asia Debenture 2083/84 |
| 12 | 10.25 % Prabhu Bank Debenture 2086 |
| 13 | 10.25 % SBL Debenture 2086 |
| 14 | 10.25 % Sunrise Bank Debenture 2083 |
| 15 | 10.50 % Nepal Investment Debenture 2086 |
| 16 | 10.50% SBL Debenture 2082 |
| 17 | 11 % NIC Asia Debenture 2082/83 |
| 18 | 8 % BOK Debenture 2079 |
| 19 | 8% EBL Debenture 2078 |
| 20 | NIC Asia Debenture 2081/82 |
| 21 | NIC Asia Debenture 2085/86 |
| 22 | Sanima Bank Limited Debenture |
| 23 | 8.25 % Sanima Debenture 2086 |
| 24 | 8.5 % Nepal Investment Bank Bond 2086 |
| 25 | 8.75 % Prime Debenture 2085 |
| 26 | 9.5% NCC Rinpatra 2086 |
| 27 | 9 % Century Debenture 2087 |
| 28 | 9.5 % Kamana Bikas Bank Ltd. Debenture 2087 |
| 29 | 8.25 % BOK Debenture 2086 |
| 30 | 9.5 % Manjushree Finance Ltd. Debenture 2085 |
Many companies are issuing debenture to expand their investment. There is no certain restriction for debenture so companies issuing debenture for a certain period and collect huge from the investor.
Role of Debenture in Nepalese Capital Market
Nepalese capital market does not have a huge history, but recently the capital market is growing faster because of the different financial instruments, the increasing literacy rate in the financial sector, and new technology.
Currently, many organizations are seeing debenture as a good financial option. So, Debenture is a safe investment for lenders and a good source for borrowers. The Debenture holders get the interest which is expenditure for the issue so the company can take benefit in tax calculation. Issuing debenture does not take a long time so it is a prominent source for organizations to collect money.
Although debenture is good for lenders and borrowers, it has a lot of risks for them as well. Finally, the debenture market is new in Nepal so it needs good and proper rules and regulations, guidance to make it more feasible.