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Questions
State any four disadvantages of debentures.
List the disadvantages of debentures.
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Solution
Following are disadvantages of debentures:
- Fixed Obligation: Payment of interest is a fixed commitment of the organization whether it is earning profit or not. Sometimes companies have to borrow funds for payment of interest to debenture holders.
- Reduction in Credibility: Financial institutions and lenders hesitate to lend funds in the companies having more of debentures. The credit-worthiness of a company which has issued a large number of debentures is low.
- Charge on Assets: Usually, debentures are issued against securities of fixed assets. During the time of depression, if a company is unable to pay the regular amount of interest and finds it difficult to repay the amount, in this situation the debenture holders can have claim over the assets of the company.
- No Voting Rights: The debenture holders are not allowed to vote in the management of the company. All the decisions regarding interest rate for debentures are taken by the equity shareholders only. Therefore, they remain at the mercy of equity shareholders.
- Limited Appeal: Debentures have limited appeal to investors since they lack ownership rights and voting power, making them less appealing to those looking for control and significant profits. Also, their fixed interest structure may not appeal to risk-taking investors seeking financial gains.
Notes
Students should refer to the answer according to their question and preferred marks.
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