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Issue of Zero Interest Debentures (ZID) which do not carry any explicit rate of interest has also
become popular in recent years. The difference between the face value of the debenture and its
purchase price is the return to the investor.

Merits of Debentures

The merits of raising funds through debentures are given as follows:
a) It is preferred by investors who want fixed income at lesser risk;
b) Debentures are fixed charge funds and do not participate in profits of the company;
c) The issue of debentures is suitable in the situation when the sales and earnings are
relatively stable;
d) As debentures do not carry voting rights, financing through debentures does not dilute
control of equity shareholders on management;
e) Financing through debentures is less costly as compared to cost of preference or equity
capital as the interest payment on debentures is tax deductible.

Limitations of Debentures

Debentures as source of funds have certain limitations. These are given as follows:
a) As fixed charge instruments, debentures put a permanent burden on the earnings of a
company. There is a greater risk when earnings of the company fluctuate;
b) In case of redeemable debentures, the company has to make provisions for repayment on
the specified date, even during periods of financial difficulty;
c) Each company has certain borrowing capacity. With the issue of debentures, the capacity
of a company to further borrow funds reduces.

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