Types of Debentures

There are several types of debentures on the basis of security, performance, priority, convertibility and Records.

On the basis of security

• Naked Debentures: These Debentures are not secured against any assets of the Company. In case of winding of the company, debentures holders holding unsecured debentures treated as unsecured creditors.
• Secured Debentures: These Debentures are secured by a charge on the assets of the company. These debentures are secured either on particular assets called fixed charge or on the general assets of the company called floating charge. The debentures holder has a right to recover outstanding loan & interest out of such charge assets. These debentures are issued by the company under an agreement which is called “Mortgage Deed”. Such mortgage is registered with Register of Companies.

On the basis of performance

• Redeemable Debentures: The debentures are redeemed by repayment of the amount of debentures after a specified date, as per terms & conditions issued.
• Irredeemable Debentures: In this case the issuing company does not fix any date by which debentures should be redeemed & the debentures holder cannot demand repayment of the sum of debenture from the company so long as it is going concern.

On the basis of priority

• First debentures: This type of debentures are repaid before the repayment of other debentures.
• Second debentures: These debentures are paid after payment of first debentures.

On the basis of convertibility

• Convertible debentures: Holders of such debentures are given option to convert the debentures fully or partly into equity shares or preference shares or new debentures after a specified time.
• Nonconvertible debentures: The holders of this type of debentures do not have any right to convert them into equity shares etc.

On the basis of Records

• Bearer debentures: Just like bearer cheques these debentures can be transferred freely. Payment of interest is made on productions of coupons attached with debentures.
• Registered debentures: These are transferred only by transfer deed. The complete particulars in regard to such debentures are entered into register & the interest is paid only to those whose name appears in the register