What do you mean by debenture ? What are the features of a debenture ? Explain the different types of debentures.
Meaning of Debenture:
A debenture is a written acknowledgment of debt by a company under its common seal. It is an instrument used by the companies to raise loan capital. Interest is paid to debenture holders at a fixed rate at regular intervals. According to Section 2(12) of the Companies Act, 1956, debentures include stock, bonds and any other securities of the company, which may or may not contain a change on the assets of the company.
Features of a Debenture
- It is a document which evidences a loan made by a company.
- It is a fixed interest bearing security where interest full due on specific dates.
- Interest is payable at a predetermined fixed rate, regardless of the level of the profit.
- It is repaid at a specified future date or it may be converted into shares or other instruments.
- It generally create a charge on the assets of a company as security
Types of Debentures:
The following are the types of debentures issued by a company. They can be classified on the basis of : (1) Security (2) Convertibility (3) Redemption; (4) Records and (5) Priority.
On the Basis of Security
Secured Debentures : These debentures are secured by a charge upon some or all assets of the company. A charge may be either fixed or A fixed charge is a mortgage on specific assets. These assets cannot be sold without the consent of the debenture holders. The sale proceeds of these assets are utilized first for repaying debenture holders. Floating charge generally. covers all the assets of the company.
Unsecured Debentures : These debentures are not secured by any charge upon any asset.
On the Basis of Convertibility
Convertible Debentures : These are debentures which will be converted into equity shares (either at par or premium or discount) after a certain period of time from the date of its issue. These debentures may be fully or partly convertible.
Non-Convertible Debentures : These are debentures which cannot be converted into shares in future.
On the basis of Redemption
Redeemable Debentures : These debentures that will be repaid by the company at the end of a specified period or by installments during the existence of the company.
Irredeemable Debentures : These debentures are not repayable . during the life time of the company and hence will be repaid only when the company goes into liquidation.
On the Basis of Records
Registered Debentures are those in respect of which the names, addresses and particulars of holdings of the debenture holders are entered in a register kept by the company. The transfer of debentures in this case requires the execution of regular transfer deed.
Bearer Debentures are transferable by mere delivery. The company keeps no record of such debenture holders. Payment of interest is made on the production of coupons attached to the debenture.
On the Basis of Priority
First Debentures : The debentures which have to be repaid before the other debentures are known as first debentures.
Second Debentures : The debentures, which will be repaid after the first debentures are redeemed, are known as second debentures.