Debenture And Types

Meaning of Debenture

The word ‘debenture’ has been derived from a Latin word ‘debere’ which means to borrow. Debenture is a written instrument acknowledging a debt under the common seal of the company. It contains a contract for repayment of principal after a specified period or at intervals or at the option of the company and for payment of interest at a fixed rate payable usually either half-yearly or yearly on fixed dates.

According, to section 2(12) of The Companies Act,1956 ‘Debenture’ includes Debenture Stock, Bonds and any other securities of a company whether constituting a charge on the assets of the company or not. Also there are multiple types of debentures, a company can issue.

Bond is also an instrument of acknowledgement of debt. Traditionally, the Government issued bonds, but these days’ bonds are also being issued by semi-government and non-governmental organisations.

The terms ‘debentures’ and ‘Bonds’ are now being used inter-changeably.

Types of Debenture

The different types of debentures have been explained in brief as follows:-

  • Registered Debentures: These are those debentures which are registered in the register of the company. the names, addresses and particulars of holdings of debenture holders are entered in a register kept by the company. Such debentures are treated as non-negotiable instruments and interest on such debentures are payable only to registered holders of debentures. Registered debentures are also called as Debentures payable to Registered holders.
  • Bearer Debentures: These are those debentures which are not registered in the register of the company. Bearer debentures are like a bearer check. They are payable to the bearer and are deemed to be negotiable instruments. They are transferable by mere delivery. No formality of executing a transfer deed is necessary. When bearer documents are transferred, stamp duty need not be paid. A person transferring a bearer debenture need not give any notice to the company to this effect. The transferee who acquires such a debenture in due course bonafide and for available consideration gets good title not withstanding any defect in the title of the transfer-or. Interest coupons are attached to each debenture and are payable to bearer.
  • Secured Debentures: These are those debentures which are secured against the assets of the company which means if the company is closing down its business, the assets will be sold and the debenture holders will be paid their money. The charge or the mortgage may be fixed or floating and they may be fixed mortgage debentures or floating mortgage depending upon the nature of charge under the category of secured debentures. In case of fixed charge, the charge is created on a particular asset such as plant, machinery etc. These assets can be utilized for payment in case of default. In case of floating charge, the charge is created on the general assets of the company. The assets which are available with the company at present as well as the assets in future are charged for the purpose. A mortgage deed is executed by the company. The deed includes the term of repayment, rate of interest, nature and value of security, dates of payment of interest, right of debenture holders in case of default in payment by the company. The deed may give a right to the debenture holder to nominate a director as one of the Board of Directors. If the company fails to pay the principal amount and the interest thereon, they have the right to recover the same from the assets mortgaged.
  • Unsecured Debentures: These are those debentures which are not secured against the assets of the company which means when the company is closing down its business, the assets will not be sold to pay off the debenture holders. These debentures do not create any charge on the assets of the company. There is no security for repayment of principal amount and payment of interest. The only security available to such debenture holders is the general solvency of the company. Therefore the position of these debenture holders at the times of winding up of the company will be like that of unsecured debentures. That is they are considered with the ordinary creditors of the company.
  • Convertible Debentures: These are those debentures which can be converted into equity shares. These debentures have an option to convert them into equity or preference shares at the stated rate of exchange after a certain period. If the holders exercises the right of conversion, they cease to be the lender to the company and become the members. Thus convertible debentures may be referred as debentures which are convertible into shares at the option of the holders after a specified period. The rate of exchange of debentures into shares is also decided at the time of issue of debentures. Interest is paid on such debentures till its conversion. Prior approval of the shareholders is necessary for the issue of convertible debentures. It also requires sanction of the Central Government.
  • Non-Convertible Debentures: These are those debentures which cannot be converted either into equity shares or preference shares. They may be secured or unsecured. Non-convertible debentures are normally redeemed on maturity period which may be 10 or 20 years.
    • Redeemable Debentures: These debentures are issued by the company for a specific period only. On the expiry of period, debenture capital is redeemed or paid back. Generally the company creates a special reserve account known as "Debenture Redemption Reserve Fund" for the redemption of such debentures. The company makes the payment of interest regularly. Under section 121 of the Indian Companies Act, 1956, redeemed debentures can be re-issued.
    • Irredeemable Debentures: These debentures are issued for an indefinite period which are also known as perpetual debentures. The debenture capital is repaid either at the option of the company by giving prior notice to that effect or at the winding up of the company. The interest is regularly paid on these debentures. The principal amount is repayable only at the time of winding up of the company. however, the company may decide to repay the principal amount during its lifetime.