Types of Debentures

Resource Type: Articles/Knowledge Category:

Posted Date: 15 Mar 2010    
Sharing     Education
Author: Mohammed Julfekar
Member Level: Gold    
Haider
Rating: Points: 10 (Rs 10)

Types of Debentures; Registered debentures; Bearer debentures; Secured debentures;

Unsecured debentures; Convertible debentures; Non convertible debentures; Redeemable

debentures; Irredeemable debentures

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.