Types of debentures

June 23, 2020 by Research Team

Debentures can be classified on the basis of:

1. Transferability/ Registration

• Registered Debentures- Name, address, and other holding details are registered with the issuing company.

The amount of registered debentures is payable only to those debenture holders whose name is mentioned in the register of the company.

If the debenture is transferred by the holder, it is necessary to inform the issuing company for updating its records.

• Unregistered/ Bearer Debentures- these debentures are not recorded in a register of the company.

Bearer debentures can be transferred by mere delivery to the new holder.

The interest and principal are paid to the person who produces the coupons attached to the debenture certificate.

2. Security

• Secured/ Mortgage Debentures- these debentures are secured by a charge on the asset or set of assets of the company.

The holders of secured debentures can recover the principal and unpaid interest amount out of the assets mortgaged by the company.

These debentures are further classified into– first and second mortgaged debentures.

At the time of liquidation of the company, first mortgaged debentures have the first charge over the assets of the company whereas second mortgaged debentures have secondary charge.

• Unsecured/ Simple Debentures- these debentures are not secured by any asset and are issued solely on the credibility of the company.

3. Redemption

• Redeemable Debentures- these debentures are issued for a fixed period. The principal amount is repaid to the holders on the specified date.

• Non-redeemable/ Perpetual Debentures- these debentures do not have any date of redemption.

These debentures are redeemed either when the company chooses to pay back or at the time of liquidation.

The company may pay back to reduce its liability and notifies the debenture holder by issuing due notice for it.

4. Convertibility

• Convertible Debentures- these debentures can be converted, fully or partly, into shares after a specified period of time.

      Convertible debentures are further classified into:

• Fully convertible debentures can be completely converted into equity shares.
• Partly convertible debentures have two parts- Convertible part which is converted into shares as per the agreement. Non-convertible part is repaid after the expiry of the agreed period.

• Non-convertible Debentures- these debentures do not have the feature of conversion and are repaid on maturity.