Question

Describe the various types of debentures.

Answer 1

1. Naked or Unsecured Debentures: Such debentures are unsecured and do not carry a charge on the assets of the company. They are mere promises to pay without any security. No property is mortgaged or pledged with the holders of such debentures. In case of default in payment by the company, they can only file a suit for the recovery of money. Holders of these debentures are treated as ordinary creditors.
2. Secured or Mortgage Debentures: Such debentures carry a fixed or floating charge on the assets of the company. A mortgage deed is executed by the company, describing the terms and conditions of issue. In case of default by the company, the debentureholders can recover money from the mortgaged property. A fixed charge is created on some definite and existing assets of the company. The company cannot use these assets without the consent of the debentureholders. On the other hand, a floating charge can be created on both existing and future assets. The company can deal in such assets in the usual course of business. The charge goes on shifting from asset to asset and becomes fixed when the company goes into liquidation or stops business or makes default in repayment. Any charge created by a company in favour of debentureholders must be registered with the Registrar of Companies within 30 days of its creation.
3. Redeemable Debentures: These debentures are repayable after a predetermined period during the lifetime of the company. These can be repaid on the specified date on demand by the debentureholders or on a notice of redemption by the company.
4. Irredeemable Debentures: These debentures are not repayable during the lifetime of the company. They are repaid only at the time of winding up of the company or when interest is not regularly paid on the due date. These are also known as perpetual debentures.
5. Convertible Debentures: Such debentures carry an option to their holders to convert their holdings into equity shares after a specified period. The debentureholders can become shareholders. These debentures are more attractive for investors.
6. Non-convertible Debentures: The holders of such debentures have no right to get them converted into shares. They always remain creditors of the company.
7. Registered Debentures: The names of the holders of such debentures are recorded in the company's books. Interest and principal sum is paid only to the registered holders. Such debentures can be transferred only by a transfer deed and not by delivery alone.
8. Bearer Debentures: No record of such debentures is kept by the company. They can be transferred by simple delivery without any formal notice to the company.