Define Debentures Explain Its Three Merits

Define debentures ? Explain its three merits

Answers:

Debentures are the acknowledgement of debt taken by a company from the public for a fixed period of time at a given rate of interest.
Debentures give following benefits/merits:
(a) Low cost : the cost of raising debentures is less than the cost of raising preference shares or equity shares. It is a cheaper source of finance. –
(b) No dilution of control : Debenture holders do not get any voting rights. They are not allowed to participate in decision making. Thus do not dilute the control of equity shareholders.
(c) Tax benefit for the company : The interest paid to debenture holders is considered as an expense of the company so the liabiltiy of tax reduces and the company gets tax benefits issuing debentures.