What is debenture? Explain the different types of debentures.

Answer: Meaning: A debenture is a document issued by a company under its common seal acknowledging a debt, with a promise to pay interest at a fixed rate and to repay the principal on a specified date. Under Section 2(30) of the Companies Act, 2013, ‘debenture’ includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether or not it creates a charge on the assets. Debentureholders are creditors of the company.

Types of debentures:

A. On the basis of security

• Secured debentures: secured by a fixed or floating charge on the assets of the company; on default, holders can recover their dues from the sale of those assets.
• Unsecured (naked) debentures: carry no charge on assets; holders rank as ordinary unsecured creditors.

B. On the basis of tenure

• Redeemable debentures: repayable at the end of a fixed period or by instalments.
• Irredeemable (perpetual) debentures: not repayable during the life of the company; repaid only on winding up or on default.

C. On the basis of convertibility

• Convertible debentures: may be converted into equity shares after a stated period. They may be fully convertible (whole amount converted) or partly convertible (part converted, the rest redeemed).
• Non-convertible debentures: cannot be converted into shares; repaid on maturity.

D. On the basis of registration / transferability

• Registered debentures: names of holders are recorded in the Register of Debentureholders; transferable only by a transfer deed and registration.
• Bearer debentures: transferable by mere delivery; interest is paid to the person holding the coupon.

E. On the basis of priority

• First mortgage debentures: have the first claim on the assets charged.
• Second mortgage debentures: are repaid out of the same assets only after the first mortgage debentures.

F. Others

• Zero coupon / deep discount debentures: carry no interest; issued at a large discount and redeemed at face value, the difference being the return.
• Fixed and floating rate debentures: interest at a fixed rate, or at a rate linked to a benchmark that changes.