Meaning of Debenture:
In addition to raising of capital by issue of shares a company requiring funds on long term basis, may borrow money by issue of debentures. A debenture issued by a company is usually in the form of a certificate, given under the seal of the company. Thus, a debenture is a written acknowledgement of a debt taken by the company as these are issued under the seal of the company.
A debenture certificate contains the terms of the repayment of the principal sum at a specified date and the terms of payment of interest at a fixed percent.
According to Section 2 (30) of the Companies Act, 2013 “Debenture includes debentures stock bonds and any other securities of a company whether constituting a charge on the assets of the company or not”.
Types of Debentures:
A company may issue the following types of debentures :
(1) Secured or Mortgage Debentures: These debentures are those debentures which are secured either on particular assets of the company called Fixed Charge or on all assets of the company in general, called a Floating Charge. Fixed charge denies the company from dealing with mortgaged assets, where as the floating charge does not prevent the company from using the assets. If the company is unable to repay the debentures on the due date, the debentureholders can realise their money from the assets mortgaged with them. First mortgage debentures are those that have a first claim on the assets charged and second mortgage debentures are those that have a second claim on the assets charged. In India, debentures have necessarily to be secured.
(2) Unsecured or Naked Debentures: These debentures are those debentures which are not given . any security. The holders of such debentures are treated as unsecured creditors at the time of liquidation of the company. Such debentures are not very common these days, so much so that, unless otherwise stated, a debenture is presumed to be secured.
(3) Registered Debentures: Names and address of the holders of such debentures are recorded in a register of the company called “Register of Debenture holders”. Such debentures are not freely transferable. The transfer of such debentures requires the execution of a proper transfer deed. Principal amount and interest on such a debenture is paid to the person whose name appears in the company’s register.
(4) Bearer Debentures: Names and address of the holders of such debentures are not recorded in the company and these debentures are transferable by mere delivery. Payment of principal and interest is made to the bearer of such debentures. Coupons are attached with these debentures and the interest is paid to such persons who produce the coupons in the specified bank.
(5) Redeemable Debentures: Redeemable debentures are those debentures which will be repaid by the company either in lump-sum at the end of a specified period or by installments during the lifetime of the company. Most of the debentures are generally of this type.
(6) Irredeemable or Perpetual Debentures : Irredeemable debentures are those debentures which are not repayable by the company during its lifetime. These debentures are repayable only at the time of liquidation of the company.
(7) Convertible Debentures: Convertible debentures are those debentures which are convertible into equity shares or other securities at a stated rate of exchange either at the option of debenture holders or at the option of the company after a specified period. When only a part of the amount of debenture is convertible into shares, such debentures are called “Partly Convertible Debentures”. When the full amount of debenture is convertible into shares such debentures are called “Fully Convertible Debentures”. SEBI guidelines require that where the conversion is to be made at or after 18 months from the date of allotment but before 36 months any conversion in part or whole shall be optional on the part of the debenture holders. Convertible debentures are very popular these days, as they provide liquidity, safety capital appreciation and assured return to the investors.
