Brief note on three different types of Debentures

Debentures are classified into three classes:

(a) Debentures payable to a registered holder, and debentures payable to a bearer.

(b) Secured and unsecured debentures.

(c) Redeemable and perpetual debentures.

1. Registered debentures and bearer debentures:

Registered debenture is one which is registered in the name of a holder in the books of the company. It is transferable in the same way as a share. These debentures are not negotiable instruments. Interest on such a debenture is payable to the registered holder or the order of the registered holder.

A company may issue debentures payable to the bearer. These are negotiable instruments and the title to them is, therefore, transferable by mere delivery of the debenture to the transferee. In case of bearer debentures, the company keeps no register of debenture holders in respect of them, but if such debentures are secured they must be entered in respect of them, but if such debentures are secured they must be entered in the register of charges. The coupon is attached to the bearer debenture for payment of interest and must be presented for payment to the company’s bankers when the date of payment arrives.

2. Secured and unsecured debentures:

Debentures issued by a company may be secured or unsecured. Debentures which do not carry any charge on the assets of the company are unsecured or naked debentures. In such a case the debenture-holder is an ordinary unsecured creditor of the company.

When some assets or property of the company are charged in favor of the debenture-holder, the debentures are deemed to be secure. The charges which a company may create on its assets may be:

i) By way of a specific charge or mortgage on particular property of the company;

ii) By way of floating charge;

iii) By both a specific and a floating charge.

3. Redeemable and perpetual debentures:

Debentures issued by the company are generally redeemable. A redeemable debenture is one under which the principal money is paid-off to the debenture-holder on the expiry of the fixed term. The company may redeem a certain number of debentures each year or option may be given to the company to redeem all of them by a specified date. Redeemed debentures can be re-issued by the company either by re-issuing the same debentures or by issuing the other debentures in their place.

Perpetual debentures are also known are irredeemable debentures. Such debentures are payable only in the event of a winding up or on some serious default by the company or payable at a remote period- such as hundred years after issue. If debentures are issued as irredeemable or perpetual, there would be no time within which the company would be bound to pay them. This does not mean that the company can never pay them off even if it wishes to do so. It only means that the creditors cannot at any time compel the company to redeem them. A perpetual mortgage in the nature of a debenture issued by a company is valid under section 120 of the companies act; through it will be invalid under transfer of property act.

Convertible debentures:

In the case of these debentures an option is given to the debenture-holders to convert them into preference or equity shares at a stated rate of exchange after a certain period. Section 81(3) permits the issue of this type of debentures. This section provides for the issue of share to debenture-holders and creditors in exchange for the amount due to them where the terms of the issue of debentures or loans provide for such exchange and such terms are approved both by the special resolution of the company and by the central government.