What is Debenture?
A debenture in Nepal is a type of long-term debt instrument issued by companies to raise funds from the public or institutional investors. It works by offering investors a fixed return over a specified period, typically through regular interest payments. In Nepal, debentures are governed by the Companies Act and Securities Act, ensuring transparency and investor protection. Investors who purchase debentures become creditors to the issuing company and are entitled to receive interest periodically until the maturity date when the principal amount is repaid.
Are debentures considered as debt or equity?
Debentures are considered as debt rather than equity. In Nepal, when companies issue debentures, they are essentially borrowing funds from investors and agreeing to repay the principal amount along with interest over time. Unlike equity, which represents ownership in the company, debenture holders do not have voting rights or ownership stake in the issuing company. Instead, they are creditors who have a priority claim on the company’s assets in case of bankruptcy or liquidation, making debentures a form of secured or unsecured debt depending on the terms of issuance.
What are the features of convertible debentures?
Convertible debentures in Nepal have the feature of being converted into equity shares of the issuing company after a predetermined period or under specified conditions. This conversion feature provides flexibility to investors, allowing them to benefit from potential capital appreciation if the company performs well. Typically, convertible debentures carry a lower interest rate compared to non-convertible debentures, reflecting this potential upside. The conversion ratio and terms are outlined in the debenture agreement, providing clarity to investors on how their investment can be converted into equity in the future.
How do companies issue debentures in Nepal?
Companies in Nepal issue debentures by first obtaining approval from their board of directors and shareholders. They then file a prospectus with the Securities Board of Nepal (SEBON) outlining details such as the purpose of issuance, terms of repayment, interest rates, and security, if any. The prospectus must comply with the regulatory requirements of the Companies Act and Securities Act. Once approved by SEBON, the company can publicly offer debentures to investors through advertisement and subscription process, ensuring transparency and compliance with legal and regulatory frameworks.
Can individuals invest in debentures?
Yes, individuals in Nepal can invest in debentures issued by companies. Debentures offer individuals an opportunity to earn fixed returns through interest payments over a specified period, providing an alternative investment avenue beyond traditional savings accounts or equity investments. By purchasing debentures, individuals become creditors to the issuing company and are entitled to receive regular interest payments until the maturity date when the principal amount is repaid. This allows individuals to diversify their investment portfolio and manage risk by balancing equity investments with fixed-income securities like debentures, depending on their financial goals and risk tolerance.
What is the difference between secured and unsecured debentures?
Secured debenture in Nepal are backed by specific assets of the issuing company, such as land or machinery, providing a form of security to debenture holders in case of default. This lowers the risk for investors, as they have a claim on the pledged assets if the company fails to meet its obligations. In contrast, unsecured debentures are not backed by any collateral, relying solely on the creditworthiness of the issuing company. Consequently, unsecured debentures typically offer higher interest rates to compensate for the increased risk borne by investors.
Are debentures tradable in the secondary market?
Yes, debentures can be traded in Nepal’s secondary market after their initial issuance. Investors who hold debentures can buy or sell them through stock exchanges or over-the-counter markets, providing liquidity and flexibility. The prices of debentures in the secondary market fluctuate based on market conditions, interest rates, and the financial health of the issuing company. This allows investors to exit their investments before maturity if needed, though the price may be influenced by prevailing market sentiments and perceptions of risk associated with the issuing company.
How to Draft Shareholder Agreement in Nepal?
What are the risks associated with investing in debentures?
Investing in debenture in Nepal carries several risks, including credit risk, where the issuing company may default on interest payments or principal repayment. Market risk affects the value of debentures in the secondary market due to changes in interest rates or economic conditions. Liquidity risk arises if debentures cannot be easily sold without significant price discounts. Additionally, reinvestment risk occurs when interest payments are reinvested at lower rates. Regulatory changes and issuer-specific risks, such as poor management decisions or industry downturns, further contribute to the overall risk profile of debenture investments.
How do debentures differ from bonds?
Debenture in Nepal are a type of bond, but the terms are often used interchangeably. However, debentures typically refer to unsecured corporate bonds, while bonds can encompass a broader range including government bonds, municipal bonds, and corporate bonds, both secured and unsecured. Debentures specifically emphasize their unsecured nature compared to bonds, which may have collateral backing or governmental guarantees. Bonds generally have longer maturity periods and are issued in larger denominations compared to debentures, which are often issued in smaller amounts and may have shorter to medium-term maturities.
Can companies redeem debentures before maturity?
Yes, companies in Nepal can redeem debentures before their scheduled maturity date, provided they adhere to the terms specified in the debenture agreement. Early redemption can be advantageous for companies when interest rates decline or if they have excess cash flow available for repayment. However, companies may be required to compensate debenture holders for the early redemption through a redemption premium or other terms outlined in the debenture prospectus. This flexibility benefits both issuers and investors by allowing companies to manage their debt obligations more efficiently and investors to potentially reinvest funds at prevailing market rates.
What are the tax implications of investing in debentures?
Investing in debentures in Nepal attracts tax implications primarily on the interest income earned. Interest income from debentures is generally subject to income tax as per the prevailing tax rates applicable to the investor’s income bracket. The issuer of debentures is responsible for deducting tax at source (TDS) on interest payments made to debenture holders, which they must deposit with the tax authorities. However, if debentures are held until maturity, any capital gains from redemption may be exempt from tax, subject to specific conditions outlined in tax regulations. Investors should consult with tax advisors to understand their individual tax liabilities and potential benefits associated with investing in debentures.
How do companies raise capital through debentures?
Companies in Nepal raise capital through debentures by issuing these debt instruments to investors in exchange for funds. This process involves the company deciding on the amount to be raised, the terms of the debentures (such as interest rates and maturity dates), and preparing a prospectus according to regulatory requirements. The prospectus is then filed with the Securities Board of Nepal (SEBON) for approval. Once approved, the company advertises the debenture offering and invites subscriptions from investors. The funds raised through debentures enable companies to finance business operations, expansion projects, or debt refinancing, providing an alternative to traditional bank loans or equity financing.
Can debenture holders vote in company decisions?
Debenture holders in Nepal typically do not have voting rights in company decisions, as they are creditors rather than shareholders. Voting rights are generally reserved for equity shareholders who own ownership stakes in the company. Debenture holders’ rights are limited to receiving interest payments and repayment of principal according to the terms specified in the debenture agreement. However, in exceptional cases where debenture holders are granted voting rights by the company’s articles of association or debenture terms, they may participate in decisions affecting their rights as creditors, such as amendments to debenture terms or actions impacting repayment.
How do debentures affect a company’s balance sheet?
Debentures in Nepal affect a company’s balance sheet by increasing its liabilities and financial obligations. When a company issues debentures, it records the proceeds received as a liability under long-term debt in the balance sheet. The interest payments on debentures are expensed in the income statement, reducing the company’s taxable income. The presence of debentures also affects financial ratios such as debt-to-equity ratio and interest coverage ratio, which are important indicators of a company’s financial health and ability to meet its debt obligations. Proper management of debenture issuance and repayment schedules is crucial for maintaining a healthy balance sheet and sustainable financial performance.
What are the rights of debenture holders in case of default?
In Nepal, debenture holders have several rights in case of default by the issuing company. These rights are typically outlined in the debenture agreement and governed by applicable laws and regulations. In the event of default, debenture holders may take legal action to recover their investments and unpaid interest. They may also have a claim on the company’s assets if the debentures are secured, providing a degree of protection. Debenture holders may participate in insolvency proceedings and have priority over equity shareholders in recovering their investments. Clear provisions regarding default and remedies are crucial aspects of debenture agreements to safeguard the interests of debenture holders.
How are interest payments made to debenture holders?
Interest payments to debenture holders in Nepal are typically made through electronic bank transfers directly to the bank accounts registered by the debenture holders. Companies issuing debentures are responsible for ensuring timely and accurate payment of interest as per the terms specified in the debenture agreement. The interest payment dates, frequency (such as quarterly or semi-annually), and the interest rate are predetermined and communicated to debenture holders through the prospectus and other disclosure documents. Debenture holders receive interest payments regardless of the company’s profitability, making it a reliable source of fixed income for investors.
Can debentures be converted into equity shares?
Yes, debentures in Nepal can be structured as convertible debentures, allowing holders to convert their debt holdings into equity shares of the issuing company under specified conditions and at a predetermined ratio. This conversion feature provides flexibility to debenture holders, enabling them to benefit from potential capital appreciation if the company’s share price increases. The terms and conditions for conversion, including conversion ratio, timing, and adjustments in case of corporate actions, are outlined in the debenture agreement. Companies may issue convertible debentures to attract investors seeking both fixed income and potential equity participation, thereby diversifying their investor base.
What is the role of trustees in debenture issues?
Trustees play a crucial role in debenture issues in Nepal by safeguarding the interests of debenture holders. They act as intermediaries between the issuing company and the debenture holders, ensuring compliance with the terms of the debenture agreement and regulatory requirements. Trustees oversee the utilization of proceeds raised through debenture issuance, monitor the financial performance of the issuer, and ensure timely payment of interest and principal to debenture holders. They may also represent the interests of debenture holders in case of defaults or disputes, working to protect their rights and facilitate resolutions. Trustees are appointed based on their expertise and reputation for impartiality, enhancing investor confidence in debenture investments.
How are debenture terms and conditions determined?
Debenture terms and conditions in Nepal are determined through a meticulous process involving the issuing company’s board of directors, legal advisors, and financial experts. These terms are documented in a debenture agreement, which specifies details such as the principal amount, interest rate, maturity date, redemption provisions, conversion terms (if applicable), security (if secured debentures), and other rights and obligations of both the issuer and the debenture holders. The terms are formulated based on market conditions, investor expectations, regulatory requirements, and the financial position of the issuing company. The debenture agreement must be approved by the board of directors and comply with the Companies Act and Securities Act, ensuring transparency and investor protection.
Are debentures subject to regulatory oversight in Nepal?
Yes, debenture in Nepal are subject to regulatory oversight to protect investor interests and ensure market integrity. The Securities Board of Nepal (SEBON) regulates the issuance and trading of debentures under the Securities Act and other relevant regulations. Companies issuing debentures must comply with SEBON’s guidelines, including filing a prospectus detailing the terms of the debenture issue, obtaining SEBON’s approval before offering debentures to the public, and adhering to disclosure requirements. SEBON monitors the activities of issuers and intermediaries involved in debenture issuance, conducts inspections, and takes enforcement actions against non-compliance. This regulatory framework aims to maintain transparency, fair practices, and investor confidence in the debenture market in Nepal.
A Guide to Debenture in Nepal
What is a debenture in Nepali company law?
A debenture is a debt instrument issued by companies to raise long-term funds.
Can private companies issue debenture in Nepal?
Yes, both private and public companies can issue debentures in Nepal.
Is SEBON approval required for debenture issuance?
SEBON approval is required for public issuance of debentures.
What types of debentures are common in Nepal?
Secured, unsecured, convertible, and non-convertible debentures are common in Nepal.
How are debenture holders protected in Nepal?
Debenture trust deeds and appointed trustees protect debenture holders’ interests.
