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- Debentures | Meaning, Issue, Features, Types, Advantages, Disadvantages
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- Types of Debentures (1)
- Debenture PDF
The debenture classification is based on their tenure, redemption, mode of redemption, convertibility, security, transferability, type of interest rate, coupon rate, etc. Ultimately, a debenture is not like a standard product configured strictly. It is an agreement to be agreed between the corporation and the debenture holders that decides the characteristics of a debenture. Following are some examples of agreement templates for ready reference and quick drafting. Redeemable debentures carry a specific date of redemption on the certificate.
Debentures | Meaning, Issue, Features, Types, Advantages, Disadvantages
Everything you need to know about the types of debentures. Debentures are the most popular form of debt capital. Basically, a debenture represents a superior and refined form of the age-old promissory note. Debentures are raised for long-term capital needs. As in the case of any debt, the debentures have two fundamental features of periodic payment of interest and repayment at a specified point of time. Debentures include debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of a company or not.
This is a debt instrument and is the commonest method of raising loan capital, as part of project financing. A debenture is a kind of document acknowledging the money borrowed containing the terms and conditions of the loan, payment of interest, redemption of the loan, the security offered if any by the company.
Security 2. Registration or Records 3. Repayment or Redemption 4. Status 5. Rank or Priority 6. Conversion 7. Coupon Rate Point of View.
Registered Debentures 2. Bearer Debentures 3. Redeemable Debentures 4. Perpetual or Irredeemable Debentures 5. Secured or Mortgage Debentures 6. Unsecured or Naked Debentures 7. Collateral Debentures 8. Convertible Debentures 9. Non-Convertible Debentures Unregistered Debentures.
These are debentures which are payable to the registered holders i. Such debentures are transferable in the same way as shares. Bearer debentures are similar to share warrants in that they too are negotiable instruments, transferable by delivery.
The interest on bearer debentures is paid by means of attached coupons. On maturity, the principal sum is paid to the bearers. These debentures are issued for a specified period of time. On the expiry of that specified time the company has the right to pay back the debenture holders and have its properties released from the mortgage or charge. Generally, debentures are redeemable. These debentures are redeemable only on the happening of a contingency or on the expiration of a period, however long.
It follows that debentures can be made perpetual, i. On the other hand, when the debenture-holders have a charge on the undertaking of the company i. When the floating charge crystallizes, the debenture-holders have a right to be paid out of the sale proceeds of the assets subject to the right of the preferential creditor but prior to making any payment to unsecured creditors.
However debentures may be issued without any charge on the assets of the company. They are mere acknowledgment of a debt due from the company, creating no rights beyond those of unsecured creditors. The term collateral security or secondary security means, a security which can be realized by the party holding it in the event of the loan being not paid at the proper time or according to the agreement of the parties. At times, the lenders of money are given debentures as a collateral security for loan.
The nominal value of such debentures is always more than the loan. In case the loan is repaid, the debentures issued as collateral security are automatically redeemed. Debentures can be classified into different types on the basis of the terms and conditions of issue:. Naked, unsecured or simple debentures are issued with merely a promise of payment, without any security by way of charge on the assets of the company for the payment of interest or capital;.
Secured or mortgage debentures are those debentures which are issued with a charge on the undertaking and assets of the company as security. The charge may be fixed, i. Registered debentures are payable to a holder whose name, address and particulars of the holdings are entered in the register of debenture-holders maintained by the company. They can be transferred by a regular transfer deed and the transfer must be registered with the company;.
Bearer debentures are payable to the bearer and are transferable by mere delivery. They are negotiable instruments, and the company keeps no records in respect of them. Interest coupons are attached to them and interest is paid to a person who produces the coupons. Irredeemable debentures or perpetual debentures are those in respect of which no time is fixed in which the company is bound to pay, although it may pay back at any time it chooses.
The debenture-holders cannot demand payment as long as the conn any is a going concern and does not make default in payment of interest. But all debentures, whether redeemable or irredeemable, become payable on the company going into liquidation.
Equitable debentures are those which are secured by deposit of little deeds of the property with a memorandum in writing creating a charge;. Legal debentures are those in which the legal ownership of the property of the company is transferred by a deed to the debenture-holders as security for the loans.
Preferred or First debentures are those which are, in the event of winding up of the company, paid first. Ordinary or Second debentures are paid after the preferred, or first debentures have been redeemed. Convertible debentures are those in which an option is given to the debenture-holders to exchange their debentures for shares in the company under certain conditions and limitations imposed regarding the period during which the option may be exercised;.
Non-convertible debentures cannot be exchanged for shares, and the debenture-holder cannot change his status to a shareholder. Debentures as the source of capital have many advantages. From the point of view of the investors, they offer a definite security and so appeal to the cautious investors. For example, a mortgage debenture-holder knows exactly what his security is, and generally, there are trustees to protect his interest. The better the security, the greater will be the chance of successful debenture issue.
The debentures of sound and stable concerns are good investment from the point of view of the class of investors who do not want to risk their savings too much and yet wish to earn an income higher than what can be earned on gilt-edged or Government securities.
Regular fixed rate of interest payable by the company to the debenture-holders even out of capital if profits are not available adds to the merits of debentures. Debentures enable the company to raise finance without giving any control to the debenture holders,.
The rate of interest payable on them is fixed, as well as lower than the rates of dividend paid on shares;. Debentures being issued for a fairly long period, there is a certainty of finance for that specific period and the company is in a position to adjust its financial plan accordingly;.
Debentures are of many types. They can be classified on various grounds. Bearer debentures are those debentures which can be transferred by mere delivery. Interest on such debentures is paid with the help of coupons attached with the debentures. The holder of debentures can get the payment by presenting these coupons to the bank. Contrarily, if the debentures can be transferred by prior information to the office of the company, such debentures are called registered debentures.
Under it, principal and interest can be paid to that holder whose name is registered in the office of the company. If the amount of debentures is to be repaid after a specific period of time, such debentures are called redeemable debentures. On the other hand, irredeemable debentures can be redeemed at the option of the company.
Such debentures are redeemed at the time of liquidation of company. If the debenture holders of a company have the option to convert their debentures into equity shares after a fixed period and at a fixed price, such debentures are called convertible debentures. If the debenture holders do not have this option, the debentures will be called non-convertible debentures. When at the time of issue of debentures the assets of company are mortgaged in favour of debenture holders, such debentures are known as secured debentures.
The charge on assets of company is of two types — i Fixed charge ii Floating charge. Floating charge is not created on specific assets and the company can transact the assets of the company ordinarily. Unless this charge becomes fixed, company can purchase or sell the assets.
At the time of liquidation or on the appointment of liquidator by the debenture holders, the charge becomes fixed. Under the floating change, at the time of liquidation, the debenture holders get the right of payment after paying the preferential creditors but before payment to unsecured creditors.
Fixed charge is made on a specific asset and the company cannot sell or transfer such asset. But such asset can be used in the operation of business. At the time of liquidation, the claims of debenture holders can be settled by selling these assets. On the other hand, if at the time of issue of debentures no fixed or floating charge is created, debentures are called unsecured.
They are those debentures in respect of which the names and addresses of the debenture holders and the particulars of the debentures held by them are entered in register of debenture holders maintained by the company. As such, the payment of interest and the repayment of these debentures are made only to the persons whose names are recorded in the register of the company.
These debentures are not negotiable instruments. So, they cannot be transferred by mere delivery or by endorsement and delivery. They can be transferred only through the execution of proper instrument of transfer. They are those debentures in respect of which the names and the addresses of debentures holders and the particulars of the debentures held by them are not entered in the register of debentures holders maintained by the company. As such, the payment of interest and the repayment of these debentures are made to the bearers or the holders of the debentures.
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In corporate finance , a debenture is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest. The legal term "debenture" originally referred to a document that either creates a debt or acknowledges it, but in some countries the term is now used interchangeably with bond , loan stock or note. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest. Although the money raised by the debentures becomes a part of the company's capital structure , it does not become share capital. Debentures are freely transferable by the debenture holder. Debenture holders have no rights to vote in the company's general meetings of shareholders , but they may have separate meetings or votes e.
Types of Debentures (1)
Debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not. The following are the important types of debentures of the Joint Stock Company. The holders of these debentures are considered insecure creditors at the time of winding up of the company. So these are not popular these days.
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A debenture may, be defined as document issued by the company as an evidence of debt. The debentures may be secured or unsecured. In the American terminology, only unsecured bonds are called as debentures.
Everything you need to know about the types of debentures. Debentures are the most popular form of debt capital. Basically, a debenture represents a superior and refined form of the age-old promissory note. Debentures are raised for long-term capital needs.
This article throws light upon the top thirteen types of debenture. Simple, Naked or Unsecured Debentures 2. Secured or Mortgaged Debentures 3. Bearer Debentures 4.
are a debt instrument used by companies and government to issue the loan. Companies use.
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