DEBTS: DEBENTURES, TYPES OF DEBENTURES

DEBENTURES: When borrowed capital is divided into equal parts, then, each part is called as a debenture. Debenture represents debt. For such debts, company pays interest at regular intervals. It represents borrowed capital and a debenture holder is the creditor of the company.

Debenture holder provides loan to the company and he has nothing to do with the management of the company.

Kinds of Debentures: A company can issue different kinds of debentures.

a) 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 such debentures is possible through a regular instrument of transfer which is duly signed by the transferee and the transferor. However, the transfers are freely allowed through the execution of a regular Transfer Deed. Only formal approval of the Board is necessary. Interest on such debentures is paid 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. Such debentures are similar to Share Warrants; the interest on them is paid by means of attached coupons which encashed by the holder are as and when cash falls due. On maturity, the principal sum of Bearer Debenture is paid back to the holder.

b)Secured and Unsecured Debentures: This classification is made on the basis of security offered to debenture-holders. Secured debentures are those which are secured by some safe charge on the property of the company. The charge or, mortgage may be “Fixed”, or, “Floating”, and thus, there may be “Fixed Mortgage Debentures”, or, “Floating Mortgage Debentures” depending upon the nature of charge under the category of Secured Debentures. Unsecured, or, Naked Debentures are those that, are secured by any charge on the assets of the company. The holders of such debentures are like ordinary creditors of the company. The general solvency of the company is the only security available to unsecured or, naked debentures.

c)Redeemable And Irredeemable Debentures: This classification is made on the basis of terms of repayment. Redeemable Debentures are for fixed period and they provide for payment of the principal sum on specified date, or, on demand, or, notice. Irredeemable Debentures are not issued for a fixed period. The issuing company does not fix any date by which the principal would be paid back. The holders of such debentures cannot demand payment from the company so long as it is a going concern. Such debentures are perpetual in nature as they are payable after a long time, or, on winding up of the company.

d)Convertible And Non- Convertible Debentures: This classification is made on the convertibility of the debentures. Convertible Debentures are those which are convertible into Equity Shares on maturity as per the terms of issue. Convertible Debentures are those which are convertible into equity shares on maturity as per the terms of issue. Convertible debentures are now popular in our India and many companies issue convertible debentures which are automatically converted into shares after a fixed period, or, date (usually, after three years). The rate of exchange of debentures into shares is also decided at the time of issue of debentures. Interest is paid on such debentures till

conversion. Such debentures are popular with the investing class. Non- Convertible Debentures are not convertible into Equity Shares after some period, or, on maturity. Prior approval of the shareholders is necessary for the issue of convertible debentures. 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.

Demerits of Debentures

a)Interest obligatory.

b)High liability.

c)Charged against assets.

d)Not meant for weak firms.

Merits of Debentures

a)Issuing is cheap.

b)No dilution of control.

c)Best for depression periods.