Term ‘Debenture’ is taken from the Latin word ‘Debure’. Which means “to Borrow”. Debentures are the company’s debt. These are the most popular form of debt capital. It is a form of a loan which is taken by the company to raise its capital.
Debentures are the instrument used by the companies and government to issue a corporate based loan on the reputation of the companies and a fixed rate of interest. Debentures characterize a refined form of an ancient promissory note that is raised to fulfill the long term capital needs.
Types of Debentures
Following are the eleven types of debentures used by a Joint-stock company
1. Simple Debentures
Simple debentures are also called “Naked debentures or Un Secured Debentures”. These debentures issued without any security on the asset, that’s why the holders of simple debentures are treated as unsecured creditors at the time of finish up of the company.
2. Mortgage Debentures
Theses are the Debentures which are issued against the company’s fixed asset like land, building, plant, machinery. These debentures are also called secured debentures. There are two types of mortgage debentures
- First mortgage debentures
- Second mortgage debentures
First mortgage debentures are those which have the first right to claim the fixed asset when the company is unable to repay the debentures on the due date.
Second mortgage debentures are those which have the second right to claim when the company is unable to repay.
3. Bearer Debentures
Bearer Debentures are unsecured debentures and also unregistered. Issuing authority of bearer debentures does not keep any record of the purchaser’s name and also the owner’s name of the listed debenture. Some bearer debentures have the coupon which is generally used to pay the interest.
4. Registered Debentures
Registered debentures are those debentures that have a complete record of debenture holders in the register of the company’s debenture holder register. Transferred of these must be written into the books of the company in the case of shares. These are not negotiable or transferable if the regular instrument of transfer is sanctioned by the director of the company. Interest is paid to the registered debentures holders in the same way as the distribution of the dividend.
5. Redeemable Debentures
These Debentures are very common these days because the amount of these debentures are repayable after a specified period. These are issued against the condition that the company shall redeem them on the stated date.
6. Irredeemable Debentures
These are the debentures that are not repayable after the definite period.The amount of irredeemable loan is repayable on the happening of definite possibilities. Simply there is no fixed limit within which the company should repay the loan. Usually, these debentures are paid when the company goes into liquidation.
7. Floating Debentures
In floating debentures, total assets must be signed over by the creditors. These types of assets may be Bills Receivable, Stock and Book Debts. In case of the failure on behalf of the company, It makes a charge in favor of debenture holders against other creditors.
8. Convertible Debentures
These are the debentures which are long term debt and converted into the company’s ordinary or preference shares and stock after a specified period. This opportunity is given to those which are stated in the conditions of debenture holders.
9. Equipment Trust Debentures
These are the debentures which are protected by tangible property or physical property. These debentures are issued for a specific purpose. Funds from these debentures are raised to purchase some equipment to run the business.
10. Income Debentures
These types of debenture holders are authorised to receive the interest out of the current year’s profit at a fixed rate. In case if the company is not generating profit than no interest will b paid.So these debentures are not very useful for the organization and not very popular.
11. Legal Debentures
Legal debentures are those where the name of the property or title of the property of the company is transferred by deed to creditors as security for the loan.