Definition and kinds of Debentures

Meaning and definition:

The definition of ‘debenture’ as contained in section 2(12) of the companies act does not explain the term. it reads,”Debenture includes debenture stock,bonds and any other securities of a company whether constituting a charge on the company’s assets or not”. The nature of debenture is thus not described by this definition.

According to chitty,J.”Debenture means a document which either creates a debt or acknowledges it, and any document which fulfills either of those conditions is a debenture”.

According to Palmer,”Debenture is any instrument under seal,evidencing a deed,the essence of it being the admission of indebtedness”.

Thus, the term ‘debenture’ simply means a document acknowledging a loan made to the company and providing for the payment of interest on the sum borrowed until the debenture is redeemed,i.e., the repayment of the principal sum.It may or may not be under seal and so does not necessarily imply that any charge is given on the company’s assets,through such a charge usually exists.

Characteristic/features of Debenture

  • It is issued by the company and is in the form of a certificate of indebtedness.
  • It is usually specifies the date of redemption. It also provides for the repayment of principle and interest at specified date or dates.
  • It generally creates a charge on the undertaking or undertaking of the company.


Kinds of debentures

  1. Registered debentures: Debentures made out in the name of particular persons and whose names appear in the register of debentures, are known as registered debentures. They are transferable in the same way as shares. Interest as well as the debenture amount is payable only to the registered holders.
  2. Bearer debentures: Debentures which are payable to bearer and whose name do not appear in the register of debenture holders are known as bearer debentures.
  3. Secured debentures or mortgage debentures: These debentures are secured by a charge or mortgage on the whole part of the assets of the company. The charge may be specific or fixed when a particular assets such as land and building is mortgaged. It is termed as floating charge when it is created on current assets like stock,cash and their value are constantly changing.
  4. Unsecured or naked debentures: Such debentures which are not secured by any charge on the assets of the company are called unsecured or naked debentures. The holders of these debentures are in the position of unsecured creditors.
  5. Redeemable debentures: Where debentures are to be redeemed,after a specified period or at the option of the company,they are known as redeemable debentures.
  6. Irredeemable or Perpetual debentures: This term does not connote that they will never be redeemed. It only indicates that no time limit is fixed for their redemption. However,they become repayable: I). When the company defaults in payment of interest, II). When it is wound-up.
  7. Convertible debentures: These are debentures which give an option to their holders to convert them into equity or preference shares at specified rate of exchange after a certain period. When such debenture holder exercise the right of conversion,they easy to be lender to the company and become its members. The convertible debentures may be fully convertible or partly convertible.
  8. Non-convertible debentures: Where no option is given to the holders of such debentures to convert them into preference or equity shares,they are called non-convertible debentures.

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