Introduction to Debentures

Debentures are a debt instrument which are issued by a Company. The main feature of debentures is that they are long-term securities yielding a fixed rate of interest against assets

1. Introduction to Debentures & its types

2. Introduction Definition “A debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the  issuer . ” Both corporations and governments frequently issue this type of bond to secure capital. Like other types of bonds, debentures are documented in an indenture. Debentures have no collateral. Bond buyers generally purchase debentures based on the belief that the bond issuer is unlikely to default on the repayment.  Debentures are the most common form of long-term loans that can be taken out by a corporation.  These loans are normally repayable on a fixed date and pay a fixed rate of interest. Mentioned : Interest rate, frequency of payments and security

3. Features and Types of Debentures Types - On basis of Security Types - General Classification Secured Debentures/ Mortgage debentures Unsecured Debentures/Ordinary debentures Non convertible Debentures Partly Convertible Debentures Fully convertible Debentures Redeemable Debentures Irredeemable Debenture Registered Debentures Unregistered Debentures Debenture holders are the creditors of the company carrying a fixed rate of interest. Debenture is redeemed after a fixed period of time. Debentures may be either secured or unsecured. Interest payable on a debenture is a charge against profit and hence it is a tax deductible expenditure. Debenture holders do not enjoy any voting right. Interest on debenture is payable even if there is a loss. Salient features

4. Types of Debentures On basis of security Ordinary/ unsecured Debentures : Such debentures are issued without mortgaging any asset, i.e. this is unsecured. It is very difficult to raise funds through ordinary debenture. Secured/Mortgage Debenture: This type of debenture is issued by mortgaging an asset and debenture holders can recover their dues by selling that particular asset in case the company fails to repay the claim of debenture holders. General Classification Non-convertible Debentures: A non-convertible debenture is a debenture where there is no option for its conversion into equity shares. Thus the debenture holders remain debenture holders till maturity. Partly Convertible Debentures: The holders of partly convertible debentures are given an option to convert part of their debentures. After conversion they will enjoy the benefit of both debenture holders as well as equity shareholders.

5. Types of Debentures Redeemable Debentures : Redeemable debenture is a debenture which is redeemed/repaid on a prede­termined date and at predetermined price. Irredeemable Debenture: Such debentures are generally not redeemed during the lifetime of the com­pany. So, it is also termed as perpetual debt. Repayment of such debenture takes place at the time of liquidation of the company. Registered Debentures : Registered debentures are those debentures where names, address, serial num­ber, etc., of the debenture holders are recorded in the register book of the company. Such debentures cannot be easily transferred to another person. Unregistered Debentures: Unregistered debentures may be referred to those debentures which are not recorded in the company’s register book. Such a type of debenture is also known as bearer debenture and this can be easily transferred to any other person.

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