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Disadvantages of Debenture

Disadvantages of Debenture:

Debenture finance consists of the following major disadvantages:

1. Fixed rate of interest: Debenture consists of fixed rate of interest payable to securities. Even though the company is unable to earn profit, they have to pay the fixed rate of interest to debenture holders, hence, it is not suitable to those company earnings which fluctuate considerably.

Disadvantages of Debenture
[Post Image Courtesy of Stuart Miles at FreeDigitalPhotos.net]

2. No voting rights: Debenture holders do not have any voting rights. Hence, they cannot have the control over the management of the company.

3. Creditors of the company: Debenture holders are merely creditors and not the owners of the company. They do not have any claim in the surplus profits of the company.

4. High risk: Every additional issue of debentures becomes more risky and costly on account of higher expectation of debenture holders. This enhanced financial risk increases the cost of equity capital and the cost of raising finance through debentures which is also high because of high stamp duty.

5. Restrictions of further issues: The company cannot raise further finance through debentures as the debentures are under the part of security of the assets already mortgaged to debenture holders.

Sourced From: Financial Management By C. Paramasivan And T. Subramanian

About Author Mohamed Abu 'l-Gharaniq

when an unknown printer took a galley of type and scrambled it to make a type specimen book. It has survived not only five centuries.

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