Debentures| Types of Debenture

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Debenture:-

Meaning:- in simple terminology, Debenture is an financial instrument issued by a company under its seal to take debt (loan).

To raise funds, company use debt financing, debenture may simple or naked carrying no charge on asset or mortgage. Mortgage debenture carry either a fixed or a floating charge on some or all of the assets of the company.

Section 2 (30) of the Companies Act, 2013 defines debentures as “Debenture” includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.

Features of Debentures:-

  • It is a documentary evidence of loan.
  • It is a interest bearing security.
  • It may or may not a charge on the assets of a company as security.
  • Principal sum is payable at a predefined future date and interest at a predetermined fixed rate.
  • It is converted into shares or other debentures.
  • It is bought and sold through the stock exchange.

Types of Debentures:-

Debentures can be classified on the basis of :-

  • Security
  • Convertibility
  • Permanence
  • Negotiability
  • Priority

Security:-

  1. Secured Debentures:-These debentures are secured by charge on assets of the company, floating and fixed. A fixed charge is a mortgage on specific assets. These assets cannot be sold without the consent of the debenture holders. A floating charge generally covers all the assets of the company including future one.
  2. Unsecured Debentures:-Unsecured debentures also known as Naked debentures, these debentures are not secured by any charge upon any assets.

Convertibility:-

  1. Convertible Debentures:- These debentures are fully or partly convertible into equity shares.
  2. Non-Convertible Debentures:-These debentures are not convertible into equity shares.

Permanence:-

  1. Redeemable Debentures:- These debentures are repayable as per the terms.
  2. Irredeemable Debentures:-These debentures are not repayable.

Negotiability:-

  1. Registered Debentures:- These debentures are payable to person whose name with address is recorded in the Register and not easily transferable.
  2. Bearer Debentures:- These debentures are transferable by delivery.

Priority:-

  1. First Mortgage Debentures:- These debentures are payable first out of the property charged.
  2. Second Mortgage Debentures:- These debentures are payable after first mortgage debentures.

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