Question

Define debenture. explain types of debentures.

Answer 1

Meaning: - 

When a company wants to borrow long term finance then issuing debentures is the most convenient method. Because, debentures can be repaid after a long period such as 10 years, 20 years, etc. the term debenture originates from a Latin word ‘debare’ meaning ‘to owe’. In simple term a debenture is an instrument of credit issued by a company to acknowledge its debt/loan to debenture holder upto a certain sum of money under certain terms and conditions. It is in the form of document known as Debenture Certificate.

Definition: -

According to Companies Act, sec. 2(12) “Debenture includes stock, bonds and any other securities of a company whether constituting a charge on the company’s assets or not”.

A)    On the basis of security offered

1.      Secured Debentures; -

the secured debentures are also called as mortgage debentures. They are secured by some charge on the assets or property of the company. The charge may be either fixed charge or floating charge. In case of fixed charge, specific assets are mortgaged as a security for the debentures under floating charges; the debenture holders have a claim over all assets of the company.

2. Unsecured Debentures: -

Even though majority debentures are secured debentures, some debentures may also be unsecured debentures. They do not have any charge on any assets of the company..

B). On the basis of Basis of redemption

3. Redeemable Debentures: -

Sometimes the debentures are issued for a specific period of time. After the expiry of the specific period the company can repay money to debenture holders. Such debentures are known as Redeemable Debentures.

4. Irredeemable Debentures: -

they are also called as perpetual debentures. The amount of irredeemable debentures. It is retained as a part of the permanent capital of the company. The amount is not paid during the life time of the company. They are paid back as per the convenience of the company.

C.  On the basis of transferability

5. Registered Debentures: -

these debentures are recorded in the register of debenture holders. The details recorded are in respect of the name and address of the debenture holder, the number of debentures held and other particulars.

6. Bearer Debentures: -

the bearer debentures are like bearer instruments. They can be transferred by mere delivery of the document or debenture certificate. The interest on such debentures is paid by means of attached coupons. The coupons can be Encashed by the holder as and when each falls. Permission from central Government is required before the issue of Bearer Debentures.

 D). On the basis of Conversion 

7. Convertible Debentures; -

Convertible Debentures are those which can be converted either partly or wholly into equity shares after the completion of a definite period. The rate of interest and date of conversion is decided at the time of issue. The interest is paid up to the date of conversion. On conversion the debenture holders are eligible for dividends and other rights and privileges of shareholders.

8. Non-convertible debentures; -

These debentures cannot be converted into equity shares; they are usually redeemed after a certain period of time. The non-convertible debentures may be secured or unsecured.