WHAT IS DEBENTURE AND IT’S TYPES

What is debenture ? Is the biggest question in the market. Most of the people don’t know what is debenture in actually. If you want to create a company in future you have to know very well the meaning of DEBENTURE. I hope from this article I am able to clear your question regarding “what is debenture”.

What is Debenture

Debentures represents a loan capital borrowing by company. Debentures are an important instrument for raising long term debt capital. A company can raise funds through issues of debentures, which bear a fixed rate of interest. A debenture is a document or certificate issued by a company as proof of the money lent to it by the holder. It is an acknowledgement of debt as well as an undertaking to repay the specified sum with interest on or before the prescribed date. Which it promises to repay  at a future date. Therefore, Debenture holders are creditors of the company. Debenture holders paid at a  fixed stated amount of interest at specified intervals say six months or one year.

Public issue of debentures requires that the issue be rated by a credit rating agency like CRISIL (Credit Rating and Information Services of India Ltd.) on aspects like track record of the company, its profitability, debt servicing capacity, credit worthiness and the perceived risk of lending. A company can issue different types of debentures. Issue of Zero Interest Debentures (ZID) which do not carry any explicit rate of interest has also become popular in recent years. The difference between the face value of the debenture and its purchase price is the return to the investor.

Types of Debentures

Debentures issued by a company can be of the following types:

1. Secured and Unsecured debentures: Secured debentures or Mortgage debentures are such which create a charge on the assets of the company. In case, the company makes a default in payment, the debentureholders can recover their dues from the mortgaged property. Unsecured debentures or Naked debentures on the other hand do not carry any charge or security on the assets of the company. As no property is pledged or mortgaged on their issue.

2. Registered and Bearer debentures: Registered debentures are those which are duly recorded in the register of debenture holders maintained by the company.Interest is payable only to registered holders. These can be transferred only by transfer deed or intimation to the company. In contrast, the debentures which are transferable by mere delivery. As, no record of such debentures is kept in the register of debentureholders. No legal formalities are required for their transfer and no formal notice or intimation to the company is necessary. These types of debentures are called bearer debentures.
3. Convertible and Non-Convertible debentures: Convertible debentures are those debentures that can be converted into equity shares after a specified period and on certain condition. These serves as an incentive to the debentureholders who can in course of time participate in the profits and management of the company. On the other hand, non-convertible debentures are those which cannot be converted into equity shares.
4. Redeemable and Irredeemable debentures: Redeemable debentures or callable debentures are repayable on a predetermined date or at any time prior to their maturity at the option of the company. But irredeemable debentures or prepetual debentures are repayable only at the time of winding up of company.

5. First and Second debentures: Debentures that are repaid before other debentures are repaid are known as first debentures. The second debentures are those which are paid after the first debentures have been paid back.

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