Kinds of Debentures in Company Law & Its Meaning

Kinds of debentures in company law that a company can issue depending upon its requirements. Debentures are debt instrument that helps the company to raise funds from the market for the progress of its business.

The Latin term "debere" means to borrow money or take a loan. Debentures are the same as unsecured loans in which at the time of default, the investor losses their rights in the assets of the company. Debentures refer to long-term borrowings.

Debentures represent that the repayment depends solely on the financial strength of the company.  Companies may also issue them security. When the company goes under liquidation, the company has to first pay the creditors.

What are the Kinds of Debentures in Company Law?

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

1. Security

Secured Debentures are issued against collateral security. In a situation where the borrower is a defaulter, the debenture has to liquidate the company’s assets.

Unsecured Debentures refer to the creditworthiness of a company at the time of issue to leverage the same. These debentures do not require collateral. These kinds of debentures are known as unsecured debentures.

2. Convertibility

Convertible Debenture meaning that the holders of Convertible debts have the option to convert their debenture assets into company equity shares. The kinds of debentures in company law give the details of the rights of debentures holders, the date for conversion of debentures, and other details relating to the terms and conditions that shall be specified by the company at the time of making an issue.

Partly Convertible Debentures: The issuer company of this kind of debenture has the option to convert in part of the debentures into equity shares of the company. When issuing a debt instrument, the company provides the rate of conversion and the date of conversion. The creditors and shareholders of the company both of them have the right to hold the same.

Fully-Convertible Debentures: This kind of debenture can be easily converted into equity shares by the company. At the time of issue, the kinds of debentures in company law give the rate and time of conversion. The debenture holders are provided with the same rights as shareholders of the company through the conversion process.

Non-Convertible Debentures: This kind of debenture is termed a regular debt instrument that doesn't permit its holders to convert debt into equity. The debt instruments generally have a higher interest rate than their regular instruments. These instruments are still considered debt.

3. Tenure

Redeemable Debentures referred to the word "redeemable" is used to indicate the redemption date. It is noted on the certificate. The company must repay the loan before the redemption date.

Unredeemable Debentures - The redemption of debentures is only possible at the time of liquidation of the company. This kind of debenture is not redeemed at a specific time.

4. Coupon Rate

These are Debentures based on: -

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

Zero Coupon-Rate Debentures: This kind of debenture is free of coupon rates.

5. Registration

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

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

6. Redemption

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

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

Subordinate Debentures- These kinds of debentures in company law have priority in repayment over other debenture holders at the time of liquidation.

Participating Debentures are very popular with venture capitalists. The interest will be paid in phases. The interest is not payable in the starting phase. The interest payable on debentures is lesser in the middle phase too. However, the interest paid is relatively higher in the last phase.

What are Debentures in Company law?

According to the Companies Act, 2013 debenture meaning in company law 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. The kinds of debentures in company law give a document or a certificate signed by the officers authorized by a company with an acknowledgment of money lent and guarantee of its repayment along with interest and side by side creating security on the company’s assets for the performance of its obligation.

What are Debentures in Accounting?

Debentures meaning in accounting are used to give us a medium of a long-term instrument of debt that big companies use to raise capital and borrow money. The term debentures are used in the replacement of bonds, promissory notes, etc. The documents of debentures involve information regarding the rate of interest, its repayment amount, and the time of repayment by the company.

Two methods for kinds of debentures in company law used in accounts are: -

1. Issue of debentures
2. Terms of issue of debentures

The three methods for debentures issue are as follows: -

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

What is the Redemption of debentures and its methods?

Redemption of Debentures meaning is the repayment of the given number of debentures to the holders of the debenture of the company. It is a type of discharge of liability on account of debentures that is called the redemption of debentures.

1. Redemption of debenture in a Lump sum

2. Redemption of debentures in installments

3. Redemption of debentures through purchasing from the open market

4. Redemption by conversion of debentures into shares

What are the Various Advantages of Debentures?

The company has the following advantages of issuing debentures and kinds of debentures in company law as a source of finance:

• The debentures provide a fixed interest rate at the due date.
• The rate of interest payable on Debentures is usually less than the rate of dividend paid on shares.
• These instruments are liquid and can be easily traded on the stock market.
• Voting rights are not available to debenture owners in meetings of the company.
• Inflation can make it beneficial to issue debentures, which offer a fixed rate of interest because interest is paid at the time of inflation, and there is minimal risk for holders.
• Debentures are flexible and it provides flexibility in the capital structure of the company.

Closure Now...

Kinds of debentures in company law can be issued depending upon its requirements. A debenture is referred to as long-term borrowing. The company which is issuing the debentures will make the interest payments on the debt before paying the share dividends to the shareholders. We have discussed the kind of debentures in company law, and the meaning of debentures in company law and accounting.

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