Question

Discuss the different types of debentures.

What are the types of debentures?

Explain the different types of debentures.

Answer 1

1. Secured debentures: The debentures can be secured. The property of the company may be charged as security for a loan. The security may be for some particular asset (fixed charge) or it may be the asset in general (floating charge). The debentures are secured through a ‘Trust Deed.’
2. Unsecured debentures: These are the debentures that have no security. The issue of unsecured debentures is now prohibited by the Companies (Amendment) Act, 2000.
3. Registered debentures: Registered debentures are those on which the names of holders are recorded. A company keeps a register of debenture holders, where they enter their names, addresses, and details about their holdings. The transfer of debentures, in this case, requires the execution of a regular transfer deed.
4. Bearer debenture: Names of holders are not recorded on the bearer debentures. Their names do not appear on the register of debenture holders. Such debentures are transferable by mere delivery. Payment of interest is made by means of coupons attached to the debenture certificate.
5. Redeemable debentures: Debentures are mostly redeemable, i.e., payable at the end of some fixed period, as mentioned on the debenture certificate. Repayment can be made at a fixed date at the end of a specific period or in installments during the lifetime of the company. The provision of repayment is normally made in a trust deed.
6. Irredeemable debentures: These kinds of debentures are not repaid during the lifetime of the company. They are paid only after the liquidation of the company or when there is a breach of any condition or when some contingency arises.
7. Convertible debentures: Convertible debentures give the right to the holder to convert them into equity shares after a specific period. Such a right is mentioned in the debenture certificate. The issue of convertible debentures must be approved by special resolution in a general meeting before they are issued to the public. These debentures are advantageous for the holder. Because of this conversion right, the convertible debenture holder is entitled to equity shares at a rate lower than market value, and he even participates in the profit of the company.
8. Non-convertible debentures: Non-convertible debentures are not convertible into equity shares on maturity. These debentures are normally redeemed on the maturity date. These debentures suffer from the disadvantage that there is no appreciation in value.