Debentures & It’s Types

The company issues debentures under its common seal. Debentures are the debt for the company.  The terms of payment as well as interest are mentioned on the debentures.  Section 2 (30) of Companies Act, 2013 defines debenture as “Debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the company’s assets or not.” Debentures are generally freely transferable. Debenture holders do not have rights to vote in the general meetings of the company. The interest paid to debenture holder is charged against the profit of the company.

 



Types of Debentures

There are three types of debentures based on Convertibility, Security and Redemption.  Let us learn them in detail.

i) Convertibility : On the basis of convertibility, debentures are classified into following types :

Convertible debentures : These debentures may be converted into equity shares of the issuing company after a predetermined period of time.  The convertible debentures may be partly convertible debentures and fully convertible debentures.

 

Partly Convertible Debentures (PCD): A part of these debentures may be converted into equity shares in the future at the issuers notice. The issuer company decides the ratio for conversion. It is generally decided at the time of subscription.

 

Fully Convertible Debentures (FCD): These debentures are fully convertible into Equity shares at the notice of the issuer company. The issuer company decides the ratio of conversion. When these debentures are converted into ordinary shares, investors get the status of ordinary shareholders of the company.

 

Non-convertible Debentures: These are regular debentures which cannot be converted into equity shares. Since these debentures do not have convertibility features, their rates of interest are higher than convertible debentures.

 

ii) Security : On the basis of security, debentures are classified into following types:

Secured Debentures: These debentures are secured by a charge on the fixed assets of the issuer company. In case the issuer company fails to make payment of principal or interest, the assets of the issuer company may be sold to make the payment of the secured debenture holders.

 

Unsecured Debentures: These debentures are unsecured. In case the issuer company is not able to pay the principal or interest, the investors are considered like unsecured creditors of the company.

 

iii) Redemption : On the basis of  redemption, debentures are classified into following types :

Redeemable Debentures: These are the debentures  which are redeemed or paid off after the termination of fixed term. The amount includes the principal amount and the current year’s interest. The company may redeem all the debentures at specified date. The company may also redeem a specific number of debentures  annually.

 

Irredeemable or Perpetual Debentures: These are the debentures which do not have any fixed date of redemption. They are redeemed in case the company is winding-up or they may be redeemed after a very long time. Bearer of such debentures can not force the company to redeem their debentures.

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