DEBENTURES - Accounts and Finance for Managers

Sec 2(12) of the Companies Act defines "Debenture includes debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company". Debenture is an evidencing document i.e., long-term promissory note.

Unique Features of the Debentures

  • Debentures are issued on indebtedness
  • It is an instrument which indicates the time/date schedule of repayment of principal or interest
  • The Charge is created on the assets of the company ; to protect the interest of lenders. If any default arises - the due amount of either principal or interest will be claimed through direct or debenture trustees action for the realization assets in order to secure the debt

Debentures are classified on the following basis:

  • On the basis of security
  • On the basis of holding
  • On the basis of redemption
  • On the basis of convertibility

On the basis of Security: Under this type the debentures are further classified into two categories viz secured and unsecured debentures:

Secured/Naked Debentures: There is no charge on the assets of the company which means that there is no claim on the company at the moment of default. These debentures are normally issued by the company through their well built good will during the past.

Secured or Mortgage Debenture: The type of the debentures bearing the security through the creation of charge either whole or part of the assets of the company are known as secured or mortgage debentures. These types of debentures warrant registration and finally immediately after the registration process the title deeds should be deposited under the custody of the lender.

On the basis of holding: These types of debentures are further divided into two categories viz Bearer and Registered Debentures.

  • Bearer Debenture: The interest periodical is payable to the bearer and transferable by mere delivery. It never requires registration to enter in the books. The holder is simply having the eligibility for redemption
  • Registered Debentures: The holders are required to register in the register in accordance with the Sec 152 of the Companies Act.

On the basis of redemption: This classification has two types viz Redeemable and Irredeemable:

Redeemable Debentures: Redeemable after the expiry period - Re issuance is possible with reference to Sec 121 of the companies act 1956

Irredeemable Debentures: These debentures are issued to redemption of specific event which is non happening in nature for indefinite period for e.g. Winding up of the company.

On the basis of Conversion: This type of debentures are trifurcated into the following viz Fully convertible, Partly convertible and Non convertible:

Fully Convertible Debentures

This type of debentures are fully converted into Equity shares with premium or without premium. The Conversion is normally takes after expiry of the period. The conversion is optional purely left with the discretion of the debenture holders which normally ranges in between 18 and 36 months. The interest periodical is payable till the process of conversion is over.

Non Convertible Debentures: This type of debentures never carry any option of conversion to avail the equity shares of the company immediately after conversion. In other words, these debentures are denial of option of conversion.

Partly Convertible Debentures: Under this category, there are Two parts involved, one part is meant for conversion; second part is non convertible portion:

  • Convertible portion is the portion which can be availed for conversion at or after 18 months upto 36 months, it is at the optional right of the debentureholders.
  • Non convertible portion - It does not carry any convertible portion instead it bears the redeemable portion for redemption after the expiry period.

The next important classification under the long-term sources of finance is Bonds


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