Question: Define Debentures and discuss its various kinds.

What are debentures

The Latin term “debere,” which means to borrow, is the root for the English term “debenture.” A firm
can borrow money from the general public by issuing certificates for a specified period of time and at
a fixed rate of interest if it needs money for expansion and growth without raising its share capital.
This is referred to as a debenture. In simple words, a debenture is a written document that bears the
company’s common seal and acknowledges a debt. It includes a contract for the payment of interest
at a given rate due often either half-yearly or annually on fixed dates, as well as for the repayment of
principal after a pre-determined period of time, at intervals, or at the company’s discretion.

As per Section 2(30) of the Companies Act, 2013, a “debenture” is any security issued by a company,
including bonds, debenture inventory, and other securities, irrespective of it constituting a charge on
the assets of the company.

Additionally, it is stipulated that:

1. the instruments listed in Chapter III-D of the Reserve Bank of India Act, 1934; and
2. any other instrument that may be authorised by the central government in conjunction
with the Reserve Bank of India, issued by a corporation.

Salient Features of Debentures

Some of the salient features of debentures are as follow:

1. It is an acknowledgement of the debt;

2. It is issued by the company under its common seal;
3. Debentures can be both secured or unsecured;
4. The rate of interest and the date of payment is pre-determined;
5. Debentures issued are freely transferrable by debenture holders;
6. Debenture holders do not get any voting right in the company;
7. Interest payable to the debenture holders are charged against the profits of the company.

Types of Debentures
There are various forms of debentures which a company can issue depending upon its requirement.
Debentures can be issued based on various factors i.e. performance, security, priority, convertibility and
record.
1. Based on Performance

Based on the performance, there are two types of debentures which are issued i.e.

o Redeemable Debentures

Redeemable debentures are the debentures where the date of redemption of the debentures are
specifically mentioned in the debenture certificate issued, where on such date, the company is legally
bound to return the principal amount to the debenture holder.

o Irredeemable Debentures

Irredeemable debentures continue for perpetuity and unlike redeemable debentures, there is no fixed
date on which the company needs to pay the debenture holders. It becomes redeemable only when the
company goes into liquidation.

2. Based on security

o Secured Debentures

When the debentures are issued by way of creation of charge over the assets of the company, then such
debentures are called as secured debentures. The charge created over the debentures may be fixed or
maybe floating. In accordance with the provisions of the Companies Act, 2013, such charge created has
to be registered with the Registrar within 30 days of such creation.

o Unsecured Debentures

Unlike secured debentures, unsecured debentures are issued by the company without creation of charge
over the assets of the company. In other words, these debentures do not offer any protection to the
debenture holder in case the company is unable to pay the principal amount on the due date.

3. Based on Priority

o First Mortgaged Debentures

Basically, the distinction of debentures based on priority can be called as a subcategory of the secured
debentures. First Mortgaged Debentures are those debentures which has first preference over all the
other debentures issued by the company. Such preference is claimed at the time of liquidation of the
company when the assets of the company are distributed among the credit holders.

o Second Mortgaged Debentures

Second Mortgage Debenture, as the name suggests, has second preference over the assets of the
company at the time of liquidation after the first mortgaged debentures. Only after the first mortgaged
debenture holders are satisfied, will the second mortgaged debenture holders can claim their principal
amount from the company at the time of liquidation.

4. Based on Convertibility

o Fully Convertible Debentures

Fully convertible debenture holders have the right to convert their debentures into equity shares of the
company at a future date, at the option of the debenture holders. The conversion ratio, the rights of the
debenture holders post-conversion and the trigger date for conversion are defined at the time of issue
of these debentures.

o Partially Convertible Debentures

Partially convertible debentures can be divided into two parts. The first part being the debentures which
are convertible to equity shares of the company and the second part being non-convertible debentures
which shall redeem at the expiry of its tenure. An option is given to the debenture holder to partially
convert its debt into shares of the company. Partially convertible debentures are also deemed as
optionally convertible debentures.

o Non-Convertible Debentures

Debentures which do not have an option to get converted into equity shares of the company are called
non-convertible debentures. These debentures get redeemed at the end of the maturity period.

5. Based on Record

o Registered Debenture

In case of registered debenture, the name, address, number of debentures and other details pertaining to
holding are entered by the company in the register of debentures. In such cases, the transfer of
debentures from one debenture holder to another debenture holder is recorded in the register of
debenture holders as well as register of transfer.

o Unregistered Debentures

Unregistered debentures are also called bearer debentures. Unlike registered debentures, the company
does not maintain the records of such debentures and the principal amount and the interest is paid to the
bearer of the instrument as against the name written over such instrument. These debentures are easily
transferrable in the market.