What is Debenture? Explain the different types of debentures.

Answer: Meaning: A debenture is an instrument acknowledging a debt, issued by a company under its common seal, containing a promise to pay a fixed rate of interest and to repay the principal after a fixed period. Section 2(30) of the Companies Act, 2013 states that debenture 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. Debentureholders are creditors of the company; they get fixed interest and have no voting rights.

Types of debentures

A. On the basis of security

1. Secured debentures: Secured by a fixed or floating charge on the assets of the company; on default, debentureholders can recover their dues from the sale of those assets.
2. Unsecured (naked) debentures: Not secured by any charge on assets; holders are treated as ordinary unsecured creditors.

B. On the basis of conversion

3. Fully convertible debentures (FCDs): Wholly converted into equity shares after a specified period at a pre-determined price.
4. Partly convertible debentures (PCDs): One part is converted into equity shares and the remaining part is redeemed in cash.
5. Non-convertible debentures (NCDs): Not converted into shares; redeemed in cash on maturity.

C. On the basis of redemption (permanence)

6. Redeemable debentures: Repaid on a fixed date or after a fixed period.
7. Irredeemable (perpetual) debentures: No fixed date of repayment; repaid only on winding up or at the option of the company. (Under the present law, debentures are generally issued as redeemable.)

D. On the basis of registration

8. Registered debentures: Names and details of holders are entered in the Register of Debentureholders; interest is paid to registered holders and transfer requires a transfer deed (or depository entry).
9. Bearer debentures: Payable to the bearer; transferable by mere delivery; interest is paid by coupons attached.

E. Other types

10. Zero coupon debentures/bonds: No interest is paid; they are issued at a deep discount and redeemed at face value, the difference being the return.
11. Specific coupon rate debentures: Carry a specified fixed rate of interest.
12. Floating rate debentures: Interest rate is linked to a benchmark rate and changes with it.

Thus debentures are an important source of long term borrowed capital, and different types suit different needs of the company and investors.