What Are Debentures?
Meaning of Debentures:- Debenture is a Latin word which means ‘to owe debt’. In the words of Thomas Evelyn, “a debenture is a document under company’s seal, which provides for the payment of a principal sums and interest there on at regular intervals, which is usually secured by a fixed or floating charge on the company’s property or undertaking and which acknowledges a loan to the company.”
It includes stock, bonds and any other company’s securities. It may or may not constitute charge on the assets. A document given by the company which describes the debt and is a proof of debt is known as Debenture. It secures the repayment of loan by creating charge on the assets. It may or may not be under seal.
Characteristics of Debentures:-
1. A debenture is always in written form. An oral promise to pay back the debt is not a valid debenture. It is a type of a certificate.
2. Debenture is an acknowledgment of indebtedness.
3. It is not necessary that debenture must be under seal. A debenture signed by two directors without a company seal is valid.
4. Debentures are issued in series. But there is no restriction on issue of a single debenture.
5. A company can also issue irredeemable debentures without any undertaking to repay.
6. Fixed rate of interest is paid on debentures at regular intervals of time.
7. Debentures are secured by either fixed or floating charge on assets of the company.
8. Debenture holders have no right to vote in any meeting of the company.
Kinds of Debentures:- Following are different kinds of debentures:-
1. Registered Debentures:- The debentures which are registered in the registers of the company in the name of debenture holder are known as Registered Debentures. These debentures are fully transferable. But it does not mean that they are negotiable instruments. Interest on these debentures is paid only to the registered holder. But interest may also be paid through bearer coupons.
2. Bearer Debentures:- Bearer Debentures are those debentures which work as negotiable instruments. These debentures are fully transferable and payment is made only to the bearer of the debenture. No register of these debentures is maintained by the company. Coupons are attached with these debentures for the payment of interest. The powers of the transferee of bearer debentures are same as the original debenture holder.
3. Secured Debentures:- The secured debentures are those debentures which are secured either by fixed or floating charge or both on any of the assets or property of the company.
4. Unsecured or Naked Debentures:- These debentures are just the opposite of the secured debentures. Unsecured or naked debentures carry no fixed or floating charge on the assets of the company. Unsecured debenture holders are ordinary creditors of the company. It is not compulsory to register the name of unsecured debenture holders as they do not carry any charge.
5. Redeemable Debentures:- Redeemable debentures are those which are redeemed or paid off after the termination of fixed term. The amount paid off includes the principal amount and the current year’s interest. The company always has the option of either to redeem a specific number of debentures each year or redeem all the debentures at specified date. Re-issue of redeemed debentures can be made either by re-issuing the same debentures or by replacing them with other debentures.
6. Irredeemable or Perpetual Debentures:- Irredeemable debentures are those debentures which do not have any fixed date of redemption. They are redeemed either in the event of winding up or at a very remote period of time, say 100 years. Irredeemable or perpetual debenture holders can never force the company to redeem their debentures.
7. Convertible Debentures:- Convertible Debentures are those debentures which have the option of their conversion into the equity or preference shares and such conversion has been approved by passing special resolution.
8. Non-Convertible Debentures:- Non-Convertible Debentures are totally opposite to the convertible debentures. Non-convertible debentures are those debentures which do not have the option of their conversion into the equity or preference shares.