Debentures
are promissory notes issued by the joint stock company in the private sector.
They are the debt obligations of the issuing corporation. Like government securities,
they have an issue price at which they are originally issued. A coupon interest
rate and a specified maturity date.
Types of Debentures: Following are the types of debentures
Straight and mortgage debentures: Based on security dimension, debentures can be classified as unsecured (or straight) debentures and secured (or mortgage debentures. Unsecured debentures have no charge on any specific asset(s) of the company while secured debentures carry a fixed or floating charge on the assets of the company. The usual practice is to create a charge on the immovable properties of the company both present and future by way of any equitable mortgage. The equitable mortgage is affected by depositing the title deeds relating to the mortgaged assets in favor of the trustees of the debenture holders. The public limited companies issuing debentures to the public are permitted to issue only secured debentures.
Registered & Bearer Debentures: As per dimension of transferability, debentures can be classified as registered and unregistered debentures. Unregistered debentures (or bearer debentures) are freely negotiable and can be transferred by a simple endorsement. On the other hand, registered debentures can be transferred only by executing a transfer deed and filing a copy of it with the company. The registered debenture holder receives interest cheques form the company whereas interest is paid on bearer debentures only upon presentation. According to the company’s act 1956, only registered debentures are to be issued in public.
Convertible and Non-convertible Debentures: Debentures can also be classified into convertible and non convertible debentures depending upon whether they carry a conversion feature or not. Convertible debentures are the ones which can be converted into equity shares at the option of the debenture holders. In this case, the ratio of conversion (the number of shares exchanged for the converted portion) or alternatively the conversion price (the price at which equity shares are exchanged for the converted portion of the debentures) and the period during which the conversion can be effected are specified at the time of the issue. Convertible debentures can be either fully convertible or partly convertible. In the case of partly convertible debentures, the non convertible portion will carry interest until it is repaid as per the provisions in the indenture. Of late, non convertible debentures have been issued with warrants which entitle the holder to buy a specified number of shares on a specified future date at a fixed price.
Convertible’ Zero-coupon Bond: A Zero coupon bond as a loan instrument slightly different from a debenture. A debenture is usually offered a face value (say Rs.100), earns a stream of interest (say, 14% p.a) till redemption and is redeemed with or without premium. Unlike the above, a zero coupon bond, say a five year bond, may be offered at a discount (say Rs.50), fetches no periodic interest and is redeemed at the face value (say Rs.100). The return on such a bond when subscribed to at Rs.50 is also about 14%. It is just that in this case the interest is reinvested in the company for a period of five years. A zero coupon bond may also be redeemed by allocation of ordinary shares. For want of better terminology, such a bond has been referred to as a “Convertible” zero coupon bond.
Types of Debentures: Following are the types of debentures
Straight and mortgage debentures: Based on security dimension, debentures can be classified as unsecured (or straight) debentures and secured (or mortgage debentures. Unsecured debentures have no charge on any specific asset(s) of the company while secured debentures carry a fixed or floating charge on the assets of the company. The usual practice is to create a charge on the immovable properties of the company both present and future by way of any equitable mortgage. The equitable mortgage is affected by depositing the title deeds relating to the mortgaged assets in favor of the trustees of the debenture holders. The public limited companies issuing debentures to the public are permitted to issue only secured debentures.
Registered & Bearer Debentures: As per dimension of transferability, debentures can be classified as registered and unregistered debentures. Unregistered debentures (or bearer debentures) are freely negotiable and can be transferred by a simple endorsement. On the other hand, registered debentures can be transferred only by executing a transfer deed and filing a copy of it with the company. The registered debenture holder receives interest cheques form the company whereas interest is paid on bearer debentures only upon presentation. According to the company’s act 1956, only registered debentures are to be issued in public.
Convertible and Non-convertible Debentures: Debentures can also be classified into convertible and non convertible debentures depending upon whether they carry a conversion feature or not. Convertible debentures are the ones which can be converted into equity shares at the option of the debenture holders. In this case, the ratio of conversion (the number of shares exchanged for the converted portion) or alternatively the conversion price (the price at which equity shares are exchanged for the converted portion of the debentures) and the period during which the conversion can be effected are specified at the time of the issue. Convertible debentures can be either fully convertible or partly convertible. In the case of partly convertible debentures, the non convertible portion will carry interest until it is repaid as per the provisions in the indenture. Of late, non convertible debentures have been issued with warrants which entitle the holder to buy a specified number of shares on a specified future date at a fixed price.
Convertible’ Zero-coupon Bond: A Zero coupon bond as a loan instrument slightly different from a debenture. A debenture is usually offered a face value (say Rs.100), earns a stream of interest (say, 14% p.a) till redemption and is redeemed with or without premium. Unlike the above, a zero coupon bond, say a five year bond, may be offered at a discount (say Rs.50), fetches no periodic interest and is redeemed at the face value (say Rs.100). The return on such a bond when subscribed to at Rs.50 is also about 14%. It is just that in this case the interest is reinvested in the company for a period of five years. A zero coupon bond may also be redeemed by allocation of ordinary shares. For want of better terminology, such a bond has been referred to as a “Convertible” zero coupon bond.
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