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Companies Act

What are Debentures and various types of Debentures | Details

November 4, 2019 by Team Instabizfilings

Blog Details

According to Section 2(30) of Companies Act,  2013, “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. Debenture constitutes a loan i.e. it is a borrowed capital. It acknowledges a debt over a company. Debenture holders acquire status of creditors. Following are the types of debentures given in the image.

 

On the Basis of Security

1) Secured Debentures

These instruments are secured by a charge on the fixed assets of the issuer company. So if the issuer fails on payment of the principal or interest amount, his assets can be sold to repay the liability to the investors. If company issue secured debenture then company is required to file Form CHG-1 for creating security interest.

 

2_ Unsecured Debentures

These instrument are unsecured in the sense that if the issuer defaults on payment of the interest or principal amount, the investor has to be along with other unsecured creditors of the company, they are also said to be naked debentures.

 

On the Basis of Registration

1) Registered Debentures

Registered debentures are made out in the name of a particular person, whose name appears on the debenture certificate and who is registered by the company as holder on the Register of debenture holders. Such debentures are transferable in the same manner as shares by means of a proper instrument of transfer duly stamped and executed and satisfying the other requirements specified in Section 56 of the Companies Act, 2013.

 

2) Bearer Debentures

Bearer debentures on the other hand, are made out to bearer, and are negotiable instruments, and so transferable by mere delivery like share warrants. The person to whom a bearer debenture is transferred become a “holder in due course” and unless contrary is shown, is entitled to receive and recover the principal and the interest accrued thereon.

 

On the Basis of Redemption

1) Redeemable Debentures

It refers to the debentures which are issued with a condition that the debentures will be redeemed at a fixed date or upon demand, or after notice, or under a system of periodical drawings. Debentures are generally redeemable and on redemption these can be reissued or cancelled. Debentures can be redeemed either at par or at premium.

 

2) Irredeemable Debentures

A Debenture, in which no time is fixed for the company to pay back the money, is an irredeemable debenture. The debenture holder cannot demand payment as long as the company is a going concern and does not make default in making payment of the interest.

 

On the Basis of Convertibility

1) Non Convertible Debentures

These instruments retain the debt character and cannot be converted into equity shares.

 

2) Partly Convertible Debentures

A part of these instruments are converted into Equity shares in the future at notice of the issuer. The issuer decides the ratio of conversion. This is normally decided at the time of subscription.

 

3) Fully Convertible Debentures

These are fully convertible into Equity shares at the issuer’s notice. The ratio of conversion is decided by the issuer. Upon conversion the investors enjoy the same status as ordinary shareholders of the company.

 

4) Optionally Convertible Debentures

The investor has the option to either convert these debentures into shares at price decided by the issuer/agreed upon at the time of issue.


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