What do you understand by debenture? What are the different type

What do you understand by debenture? What are the different types of debentures?

Ans.

MEANING AND DEFINITION OF DEBENTURE

The term ‘debenture‘ is derived from the Latin word ‘debere’ which means ‘to owe”. Debenture is like a certificate of borrowing issued under the common seal of the company. It is a contract between company and debenture holder. Interest is paid for it.

Following is the definition of the debenture:

“Debenture” includes stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not. [Sec. 2 (30)]

Characteristics of Debentures Following are the characteristics of debentures –

(i) Usually in the form of a certificate,

(ii) Acknowledgement of indebtedness,

(iii) Payment of a specified principal sum at a specified date,

(iv) Payment of interest,

(v) Issuance of many debentures at one time,

(vi) Generally contains charge or mortgage Debenture holders have no voting rights.

KINDS OF DEBENTURE

Classification of debentures showing in the diagram can be explained as under:

(1) Classification according to Negotiability:

(i) Registered Debentures – These debentures are payable to the registered holders. Holder’s name appears both on the debenture certificate and in the debentures’ register. These are non-negotiable instruments.

(ii) Bearer Debentures – These are debentures which are payable to ‘the bearer’. These debentures can be transferred by delivery. These are negotiable instruments. These debentures are also known as unregistered debentures.

(2) Classification according to Priority:

(i) First Debentures – These debentures are to be repaid in priority to other debentures which may be subsequently issued.

(ii) Second Debentures – Debentures which are to be repaid after the ‘first debentures’ are called as second debentures.

(3) Classification according to Permanence –

(i) Redeemable Debentures – These debentures are redeemed after a certain period. These debentures may be re-issued after redemption.

(ii) Irredeemable Debentures – Where either there is no period fixed for repayment of the principal amount of debentures or repayment of it is made conditional on the happening of an event, is known as irredeemable debentures. Irredeemable debentures are also called as perpetual debentures.

(4) Classification according to Security –

(i) Secured Debentures – If debentures create fixed or floating charge on the company’s assets are known as secured debentures.

(ii) Unsecured Debentures – Where debentures do not create any charge on the company’s property are unsecured debentures. These are also known as naked debentures.

(5) Classification according to Convertibility –

(i) Convertible Debentures – These debenture holders have an option to convert the debentures into shares. These may be fully convertible or partly convertible.

(ii) Non-convertible Debentures – These debentures do not provide option to convert them into shares. They are to be paid as and when they mature.