Debentures are written documents containing provisions and acknowledging a debt regarding the interest payment at a fixed rate and repayment of principle amount. Debentures include stock, debentures, bonds, debt and other securities of a firm constituting charge on the resources of a firm. The individual who invest money through debentures is known as debenture holder.
key Features of Debentures
No Voting Rights
Owners of debentures do not have voting rights except at their class.
These debentures have the fixed rate of interest and it is payable on the face value.
These types of debentures are redeemable throughout the existence of a firm.
Types of Debentures
Debentures are divided into various types depending upon redemption, term and conditions of issue are described below:
Unsecured or naked debentures
These debentures are not secured on any resource of a firm and owner of this debenture is known as ordinary creditor.
Secured debentures are secured either on all the resources of a firm or on a particular asset. According to the term of SEBI, non-convertible debentures passing time of 18 months should be secured.
These types of debentures are only payable to the individuals who are registered in the list of debenture holders. Interest amount is also paid to the registered holder and executing a transfer deed can only transfer these debentures.
Bearer debentures is payable only to bearer thereof. It can be transferred commonly by delivery. Interest amount is
transferred to the individual who provide interest coupon with such debentures.
Perpetual or Irredeemable Debentures
These debentures are not redeemable during the entire life of a firm. It means that the debentures do not have fixed date of redemption.
First mortgage Debentures
These debentures have a right to first claim on assets charged.
Second Mortgage Debentures
They have a second claim on assets charged.
These types of debentures are repayable after a given time by installments or in lump sum amount during the entire life of a firm.
The holders of convertible debentures have a right to convert the debentures into shares. The part of debenture which is completely convertible into shares is commonly known as FCD (fully convertible debenture). The remaining part which can not convert into shares is known as NCD (non-convertible debenture). Conversion into shares takes place according to the agreed terms and conditions of issuance.
NCD are those debentures which do not provide a right to its holder to convert them into shares. Until otherwise states, these debentures are deemed to be non-convertible.