What is meant by a debenture? Explain the different types of debentures?

The word Debenture is derived from a Latin word ‘debere’ which means to borrow. A debenture is issued in the form of a certificate under the seal of a company and containing a contract for the repayment of the principal sum after a fixed period of time and payment of interest at regular intervals, generally half yearly. Debentures are issued by a company for acquiring long-term borrowings.

 

The debentures can be classified on the following basis.

 

1. On the basis of Security

a. Secured Debentures- Mortgaged Debentures are those debentures that are secured against asset/s of a company. These are also known as secured debentures. In case the company fails to pay back the principal amount of debenture or fails to meet its interest obligations on the due date, then the debenture holders have the right to sell the mortgaged asset in order to realise their amount due to the company.

b. Unsecured Debentures- These debentures are treated as unsecured creditors. They do not have any security. These are uncommon now days.

 

2. On the basis of Tenure

a. Redeemable Debenture- These debentures are payable after the expiry of a specific period. These debentures can be redeemed at par or premium either in lump sum or in installment. Generally all debentures are redeemable.

b. Irredeemable Debenture- Irredeemable Debentures are those debentures that cannot be repayable or redeemable by a company during its life time. These are repayable only at the time of winding up of the company. These are also known as Perpetual Debentures that means debentures having indefinite life. In India, now days, no company can issue irredeemable debentures.

 

3. On the basis of Mode of Redemption

a. Convertible Debentures- Convertible Debentures are those debentures that can be converted into equity shares after a specified period of time. These are of following two types:

i. Fully Convertible Debentures: When the whole amount of a debenture is  convertible into equity shares of equivalent amount, then these debentures are called Fully Convertible Debentures. There is no need to maintain Debenture Redemption Reserves for such debentures.

 

ii. Partly Convertible Debentures: When only a part of the amount of a debenture is  convertible into equity shares, then these debentures are called Partly Convertible Debentures. In this regards, the Debenture Redemption Reserve is maintained only for the non-convertible part of the debenture.

 

b. Non-Convertible Debenture- These debentures cannot be converted into shares. Generally debentures are non convertible.

 

4. On the basis of Coupon Rate

a. Zero Coupon Rate- These debentures do not contain a specific rate of interest and can be issued at discount. The excess of the face value of the debenture over its issue price is considered as interest amount.

b. Specific Rate- These debentures carry a specific rate of interest which may be fixed or floating.

 

5. On the basis of Registration

a. Registered Debenture- While issuing such debentures, the company maintains a record regarding name, address and number of holding of debentures in the Register of Debenture Holders of the company.

b. Bearer Debentures- When a company does not maintain any record of the debenture holders and the debenture is transferable mere by delivery, then the type of the debenture held by the holders is termed as Bearer Debenture. Interests on such debentures are paid to the persons who produce the interest coupons that are attached with these debentures in a specified bank.

 

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