Debentures Meaning | Types of Debentures | Merits | Demerits

definition of Debentures

Debentures Meaning and Types

Debentures Meaning

When the borrowing capital is divided into equal parts, then, each part is known as a debenture. It represents debt. On such debts, company pays interest at regular intervals.They are the creditor of the company . Debenture holder provides loan to the company and has nothing to do with the management of the company.

Types of Debentures:

In order to have a better understanding of Debentures meaning, let’s discuss the concept of debentures in depth.

1. Registered and Bearer Debentures

This classification of debentures is made on the basis of transferability of debentures. Registered debentures are those in respect of which the names, addresses, and particulars of the holdings of debenture holders are entered in a register kept by the company. The transfer of ownership of these types of debentures is possible through a regular instrument of transfer. This instrument need the signature of both transferor and transferee.

Only formal approval of the Board is necessary. Debenture holder receives the interest through interest warrants. Bearer debentures are transferable by mere delivery. They are freely negotiable instruments. The company keeps no records of the debenture- holders in the case of bearer debentures.

2. Secured and Unsecured Debentures

Classification of debentures on the basis of security comes in this category. Secured debentures are those which are secured by some safe charge on the property of the company.

Unsecured or  Naked Debentures are those that, are secured by any charge on the assets of the company. The holders are like ordinary creditors of the company. The general solvency of the company is the only security available to unsecured or, naked debentures.

3. Redeemable And Irredeemable Debentures

This classification is made on the basis of terms of repayment. Debentures which gets redeem after a certain period are known as redeemable debentures. In these debentures, debenture holder receives payment of principal amount on the date of redemption.  On the other hand, debentures which does not get redeem are irredeemable debentures. The holders of these debentures cannot demand payment from the company so long as it is a going concern. They are perpetual in nature as they are payable after a long time, or, on winding up of the company.

4. Convertible And Non- Convertible Debentures

This classification is made on the convertibility of the debentures. Convertible Debentures are those debentures which are convertible into equity shares on maturity as per the terms of issue.  ]These type of debentures have become quite popular in India nowadays. Many companies issue debentures which on a certain date converts into equity shares.

Company decides the rate of exchange of debentures into equity share at the time of the issue. Till the conversion period, debenture holder receives interest. Such debentures are popular with the investing class. Non- Convertible Debentures does not converts into equity after some period, or, on maturity. Prior approval of the shareholders is necessary for the issue of these types of debt instruments.

It also requires sanction of the central government. The conversion of debentures into shares particularly of profitable companies is always advantageous to debenture holders as well as to the company.

Merits and Demerits of Debentures

To get further in depth knowledge of debentures meaning, lets also discuss the plus and negative points of debentures.

Demerits of Debentures

  1. Interest obligatory.
  2. High liability.
  3. Charged against assets.
  4. Not meant for weak firms.

Merits of Debentures

  1. Issuing is cheap.
  2. No dilution of control.
  3. Best for depression periods.
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