The IPO and shares have been emerging as favorable investment options in Nepal. But, overshadowed by IPO and shares, there is another better investment option: Debentures. Novice investors should also consider debentures as their investment option as they are less risky and stable than shares. This article shall guide you to know more about debenture in Nepal.
What is a Debenture?
Debentures are debt instruments used by corporations and governments to borrow money at fixed rates. Debentures are not backed by any collateral but by the creditworthiness and reputation of the issuer. Bonds and debentures are similar to each other in that governments generally issue bonds while companies issue debentures. In Nepal, the general public cannot invest in government bonds.
The most common ways that government raise the money through various government securities.
How Does Debenture Work?
A company can raise its capital either by issuing stocks ( IPO or FPO) or by taking loans (debenture). Usually, the company issues debentures to raise capital to meet the expenses of an upcoming project or to pay for a planned expansion in business. The company issues debenture committing to pay a fixed interest for a fixed amount of time to whoever is the holder.
For example, Citizens Bank Limited is planning to expand its branches and adopt new technologies. All of this development will require a significant investment. Thus, they issue debenture to raise the funds. The debenture is the preferred way of source of fund for the company because can control the interest rate. Since they would be paying the fixed sum every year. This enables them to calculate and manage their risk for the foreseeable future.
After the maturity period (usually 7-10 Years), the principal amount is paid to the investor after maturity (when the debenture contract expires). The contract becomes non-existent once the principal is fully paid. The par value of debentures in Nepal is 1000 and the interest ranges between 9-10.5% annually.
Think of debenture as giving the loan and enjoying the interest. The mechanism of debenture is the same as that of borrowing long-term loans. The key difference is that debenture has no collateral and is based on the reputation of the company and that the interest and term are fixed beforehand.
Benefits of Debenture in Nepal
1) Safer Investment
Debentures are considered safer investment vehicles than stocks because their value cannot be manipulated as easily as stocks’. The majority of the time, the companies that issue debentures are large corporations with a solid reputation. Debenture holders receive their interest first, before preferred and common shareholders receive their dividends. So, even if the company is not doing well, shareholders may not receive dividends but debenture holders would definitely receive their interest.
2) Fixed Interest Rate
At the time of issuance, the debt issuer commits to paying the investor a predetermined coupon rate. The debt contract promises periodic interest payments, and the investor has a legal right to receive them. Since the interest rate is predetermined, there is no effect of market interest fluctuations on the debenture. The fixed interest rate will be paid despite the increase or decrease in market rates.
3) Fixed Tenure
The debenture is held for a fixed time period usually from 7-10 years. The security is extinguished once the principal has been repaid to the investor. As a result, capital is only locked up for a limited time. You will be paid the amount in the predetermined time with interest.
Debentures are not affected by the change of market interest rates and monetary conditions. Thus, it is safer and stable than the share market that has huge variations and fluctuations in prices.
5) Debenture Holders Before Shareholders
Shareholders are the owner of the company whereas the debenture holders are the liability of the company. Thus, if the company goes bankrupt, the main priority would be given to pay the loan of debenture holders. After all the liability is paid, then only shareholders are given the remaining portion from the liquidation.
How to Invest in Debenture in Nepal?
Companies issue debentures to meet their capital needs. The process of applying for debenture is the same as applying for IPO.
- Log in to your Mero Share account
- Check if debenture has been issued.
- Apply for the debenture with the units and amount of money you want to apply. The par value of debenture in Nepal is Rs 1000.
- Wait until the allotment if your debenture units have been allocated to you.