What are debentures?
Debentures are creditor ship securities representing long-term indebtedness of a company. A debenture is an instrument executed by the company under its common seal acknowledging indebtedness to some person or persons to secure the sum advanced. It is, thus, a security issued by a company against the debt. A public limited company is allowed to raise debt or loan through debentures after getting certificate of commencement of business if permitted by its Memorandum of Association. Companies Act has not defined the term debenture.
Debentures, like shares, are equal parts of loan raised by a company. Debentures are usually secured by the company by a fixed or floating debentures at periodical intervals, generally six months and the company agrees to pay the principal amount at the expiry of the stipulated period according to their terms of issue. Like shares, they are issued to the public at part, at a premium or at a discount. Debenture-holders are creditors of the company. They have no voting rights but their claims rank prior to preference shareholders and equity shareholders. Their exact rights depend upon the nature of debentures they hold.
Debentures can be of following types:
Redeemable and Irredeemable Debentures
Redeemable debentures are those which can be redeemed or paid back at the end of a specified period mentioned on the debentures or within a specified period at the option of the company by giving notice to the debenture holders or by installments as per terms of issue. Irredeemable debentures are those which are repayable at any time by the company during its existence. No date of redemption is specified. the debenture holders cannot claim their redemption. However, they are due for redemption if the company fails to pay interest on such debentures or on winding up of the company. They are also called perpetual debentures.
Secured and Unsecured Debentures
Secured or mortgaged debentures carry either a fixed charge on the particular asset of the company or floating charge on all the assets of the company. Unsecured debentures, on the other hand, have no such charge on the assets of the company. They are also known as simple or naked debentures.
Registered and Bearer Debentures
Registered debentures are registered with the company. Name, address and particulars of holdings of every debenture holders are recorded on the debenture certificate and in the books of the company. At the time of transfer, a regular transfer deed duly stamped and properly executed is required. Interest is paid only to the registered debenture holders. Bearers debentures on the other hand, are transferred by more delivery without any notice to the company. Company keeps no record for such debentures. Debentures-coupons are attached with the debentures-certificate and interest can be claimed by the coupon-holder.
Convertible and Non-convertible Debentures
Convertible debentures are those which can be converted by the holders of such debentures into equity shares or preference shares, cannot be converted into shares. Now, a company can also issue partially convertible debentures under which only a part of the debenture amount can be converted into equity shares.