What is a Debenture?
Section 2(30) of the Companies Act, 2013 defines a debenture which includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.
So basically, it is a kind of document evidencing a debt or acknowledging it and any such document that fulfils such conditions is a debenture. It contains a contract of repaying principal after a particular period or at regular intervals or at option of the company, and payment of interest at a fixed rate usually either half-yearly or annually on a fixed date.
Types of Debentures?
1. On the basis of Security
a. Secured: Such debentures where the charge is created on specific assets of the company for payment purpose in case if default arises, and they have the greatest protection here because they are totally convinced of their principal and interest at due date of redemption.
b. Unsecured: Such debentures aren’t secured by charge on companies’ assets, and therefore also known as naked debentures, and that’s why even the interest rate payable on them is way higher than those payable on secured ones.
2. On the basis of Tenure
a. Redeemable: They are basically payable on the maturity or the completion of a specified period either in lump sum or as per the decided instalments during the lifetime of the company and they can be redeemed at par or at premium.
b. Irredeemable: Also known as Perpetual debenture as here the company doesn’t provide any guarantee of repaying the money that were collected through issue of debentures, and are repayable either on winding up of the company or after completion of a longer duration, and they can be for fixed terms or repayable on demand.
3. On basis of mode of redemption
a. Convertible: Such debentures are converted into equity shares of the company after the completion of a specified period of time.
b. Non-Convertible: Such debentures aren’t converted into equity shares and are rather redeemed at completion of a specific period of time.
c. Partly-Convertible: Basically, divided into two parts; here the ‘convertible’ portion is converted to equity shares after a fixed period, and the ‘non-convertible’ portion is redeemed at specified period as per the terms of issue.
4. On basis of Negotiability:
a. Registered: Also known as non-negotiable instruments, such debentures are not transferable by mere delivery of debenture certificates and shall be transferred as per the provisions of the Companies Act, by executing transfer deeds and the transfer registered by the company.
Here a registered holder means such person whose name appears both in register of debenture holders as well as in debenture certificates, and the principal and interest are thereby payable to such holders as per terms of the issue.
b. Bearer: Also known as unregistered debenture, they are payable to bearers and are transferrable by a mere delivery.
Disclaimer: – The entire contents of this document have been prepared on the basis of relevant provisions and rules and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information.
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