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 classified on the following basis:
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.
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:
The next important classification under the long-term sources of finance is Bonds
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