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Debentures Meaning, Types, Examples & More

Debentures Meaning

The debentures meaning in Latin word "debere" means to take a loan or borrow money. Debentures refer to long-term borrowings. The company which are issuing the debentures will make the interest payments on the debt before paying the share dividends to the shareholders. Debentures are similar to unsecured loans where at the time of default, the investor does not have rights in the assets of the company. 

Debentures represent that the repayment depends solely on the creditworthiness and financial strength of the issuing company.  Companies may also issue them security. At the time of liquidation, the company has to pay the creditors. Investors should first verify their credit ratings before they invest in these instruments.

Debentures Meaning Long-Term Debt Instrument

Debentures refer to long-term debt instruments issued by a government or company to meet its financial requirements. Investors are paid an interest amount for being a creditor of the company. These are unsecured long-term borrowings from the public with a lengthy tenure, usually exceeding ten years.

The companies can use debentures for raising capital of the company because they have lower interest rates and shorter holding periods. These kinds of instruments are more attractive. Therefore, they can be more appealing than other long-term debt instruments. Debentures are offered to the public issue at large, just as equity shares are issued.

Debentures in company Law

According to the Companies Act, Debentures meaning includes debenture stock, bonds or any other instrument of a company in a form of debt, whether creating a charge on the company assets or not. 

Debentures is a document or certificate signed by the authorized officers of a company acknowledging money lent and guarantee of repayment with interest and creating security on the assets of the company for the due performance of its obligation.

Types Of Debentures

A company can issue different types of debentures based on requirements of capital and its objectives. Following are the types of debentures: 

1. Security

Secured Debentures are issued against collateral security. In case the borrower defaults, the debenture has to liquidate the assets of the company.

Unsecured Debentures meaning the creditworthiness and goodwill of a company when they are issued to leverage the same. These debentures do not require collateral. These types of debentures are called unsecured debentures.

2. Convertibility

Convertible Debenture: The holders of Convertible debts have the option to convert their debenture assets into company equity shares. The details of the rights of debenture holders, the date for conversion of debentures, and other details relating to the terms and conditions should be given by the company at the time of issue. 

Partly Convertible Debentures: The company issuing this type of debenture has the option to convert the debentures in part into equity shares. These types of debentures meaning that when issuing an instrument, the company determines the conversion rate and the date of conversion. The creditors and shareholders both have the right to hold the same.

Fully-Convertible Debentures: These types of debentures can be converted into equity shares by the issuer. At the time of issue, the rate and time of conversion are provided. The holders are given the same rights as company shareholders through conversion.

Non-Convertible Debentures: Non-Convertible Debentures are regular debt instrument that doesn't allow holders to convert debt into equity. Debentures represent the instruments that usually have a higher interest rate than their regular counterparts. These instruments are still considered debt.

3. Tenure

Redeemable Debentures meaning the term "redeemable" is used for the redemption date. It is noted on the certificate. The issuer should repay the loan before the date of redemption.

Unredeemable Debentures - The redemption of debentures is possible at the time of liquidation of the company. These types of debentures are not redeemed at a specific time. 

4. Coupon Rate

These are Debentures based on: - 

Special Coupon-Rate Debentures: These debentures have a predetermined price of the coupon.

Zero Coupon-Rate Debentures: These debentures are free of coupon rates.

5. Registration

Registered Debentures: The issuing company keeps a register that records details about the holder of a debenture, such as the name, address, and particulars of holding. 

Bearer Debentures meaning when they are delivered by courier. The details of the holder of the debenture are not with the issuing company.

6. Redemption

Callable Debentures: The issuer company have the power to redeem the debentures before their date of redemption. 

Puttable Debentures –The debentures holders can request the issuing company to settle the loan with a principal payment of the loan.

Subordinate Debentures- These debenture holders have priority in repayment over other debenture holders in the event of liquidation.

Participating Debentures are very popular with venture capitalists. The interest will be paid in phases. The interest is not paid in the initial phase. The interest payable on debentures is lower in the middle phase. The interest paid is higher in the final phase.

Convertible vs Non-convertible

Convertible Debentures meaning that have the option to convert their debenture assets into company equity shares whereas Non-Convertible Debentures are regular debt instrument that doesn't allow holders to convert debt into equity.  

Convertible Debenture has a lower interest rate than Non-Convertible Debentures 

Convertible Debenture comes with lesser risk than Non-Convertible Debentures 

Debentures In Accounting

Debentures are used as a medium to long-term instrument of debt that large companies use to borrow money. The term debentures are used in place of bond, note, or loan stock. The debentures documents include the details regarding the rate of interest, repayment amount, and the time when the company has to repay the debenture. 

Two types of treatment of debentures meaning in accounts are: -

  • Issue of debentures
  • Terms of issue of debentures

The three methods for issuing debentures are: -

  • Issue of debenture for cash
  • Issue of debenture other than cash
  • Issue of debenture as collateral security

Debenture Vs Bond

Differences between debenture and bond are given as follows: -

1. Debentures are issued during its business whereas bonds are generally issued during the inception of a business.

2. Debentures are backed up by the promise made by the issuer whereas bond is backed up by collateral or security or a physical asset.

3. In debentures meaning of the principal amount is repaid after the revenue derives from the particular project whereas, in the case of a bond, the principal amount is repaid after the maturity period.

4. The rate of interest is higher in debentures compare to bonds.

5. The tenure is lower in the case of debentures compare to bonds.  

Which companies issued the debentures recently in India?

The debentures example of companies that have issued debentures are:-

1. Credit Access Grameen Limited

2. Indiabulls Housing Finance Limited

3. Muthoot Finance Limited

4. Edelweiss Financial Services Limited

5. National Highway Infra trust

Methods of Redemption Debentures

The issue and redemption method of debentures means to make debentures functional in an organization. 

1. Lumpsum Method

A lumpsum redemption occurs when debenture holders receive their promised amount on a specific date. This method is simpler in comparison to other methods.

2. Instalment Method

The company agrees to redeem its debentures through instalments, which are paid following the agreement at the time of issuance.

3. Conversion Method

Debentures are commonly redeemed by converting them into equity shares.

4. Purchasing Method

A company can redeem its debentures by purchasing them in the open market f its articles of association permits. The company can redeem its shares at a discounted price, which would have a positive impact on its bottom line. is the leading platform for Compliance and legal services in India. so connect with us.