Different Types of Debentures

The word "Debenture" comes from the Latin word "Debere," which means to borrow. A debenture is a written document where a company agrees to borrow money and pay it back later, either all at once or in parts. The company also agrees to pay interest at a fixed rate, usually once or twice a year, on specific dates. According to Section 2(30) of The Companies Act, 2013, a "Debenture" includes bonds, debenture inventory, and other securities, whether or not they are backed by the company's assets.

Types of Debentures are based on factors like how and when they are repaid, their length, whether they can be converted into shares if they are secured by assets and their interest rates. Knowing the types of debentures helps in understanding which one may be best suited for investing or borrowing. Now that we have learnt what Debentures are, let’s have a look at What are the Types of Debentures. 

Different Types of Debentures

1. Based on Security

• Secured Debentures: Secured debentures are backed by the company’s assets or property as collateral for repayment. The charge on the assets can either be fixed or floating. A fixed charge is placed on specific assets that the company uses for its business operations but are not meant for sale. A floating charge, on the other hand, applies to the company’s general assets, excluding those assigned to secured creditors.

• Unsecured Debentures: Unsecured debentures are not backed by any specific assets. While they may have a floating charge by default, they generally do not offer a particular claim on the company's assets. These debentures are less commonly issued.

2. Based on Tenure

• Redeemable Debentures: Redeemable debentures are those that the company must repay after a set period, either in a lump sum or through instalments. The repayment may happen at face value or with a premium.

• Irredeemable Debentures:Also known as perpetual debentures, these are not intended to be repaid during the lifetime of the company. They are only repaid upon the closure of the company or after a long period.

3. Based on Convertibility

• Convertible Debentures: Convertible debentures can be converted into equity shares or other securities, either at the discretion of the company or the debenture holder. These debentures can be either fully or partially convertible.

• Non-Convertible Debentures: These debentures cannot be converted into equity shares or any other form of securities. Most debentures issued by companies are non-convertible.

4. Based on the Coupon Rate

• Specific Coupon Rate Debentures: These debentures are issued with a fixed rate of interest, known as the coupon rate. This interest is paid to the debenture holders periodically.

• Zero-Coupon Rate Debentures: Zero-coupon debentures do not offer any interest. Instead, they are sold at a significant discount, and the difference between the issue price and the face value is treated as interest, paid upon redemption.

5. Based on Registration

• Registered Debentures: These debentures are registered with the company, which keeps a record of the holder's details, including name, address, and the number of debentures held. To transfer these debentures, the holder must complete a transfer deed.

• Bearer Debentures: Bearer debentures can be transferred simply by delivering them to another party. The company does not keep any record of the holders. Interest is paid to the person who presents the coupon attached to the debenture.

Conclusion

Knowing the types of debentures helps businesses and investors choose the right option based on their needs. Different types, like secured or unsecured, redeemable or irredeemable, or convertible debentures, offer different benefits. It's important to pick the one that best fits your investment or financing goals.