How Many types of Debentures are There and What are Their Features?

What is Debenture?

Debt instruments that are used by the government and organization for issuing loans are known as debentures. Whenever a company needs funds for extensions and development of the company, but they don’t want to increase the company’s share capital. In this case, companies borrow funds from the public by issuing debentures. Debentures allow the companies to be more feasible with their tasks. It is an instrument of capital market.

How Many types of Debentures are There and What are Their Features?

Even though there are different types of debentures available for the companies to go with, there are some basic features for every type of debentures. For example, debentures have lower interest and the holders earn a fixed amount of interest. Debentures are usually purchased through broker or stock exchange or banks that act as a broker for this particular task. The key reason that differentiates shares from debentures is the holder of the debentures is not treated as an owner. They are more of a creditor for the companies. There are different types of debentures in general. Some of the major types are discussed below:

Registered Debentures

The debentures that are only registered with the company or with the organization are known as registered debentures. A transfer deed is needed to transfer debentures. The names of the people that appear in the register of the company are the only ones that get debenture interest in this type of debenture. This type of debentures builds trust between the companies and the holders.

Bearer Debentures

Bearer debentures are not recorded in the company’s register. In this type of debenture, transfer deed is not needed. As the name suggests, the debenture is transferable by delivery. The person who has the debenture on hold is entitled to get the interest. For this reason, the security of this type of debenture is fragile. But it is easier to raise funds and helps the speed up the process.

Secured and Unsecured Debentures

As the name suggests, secured debentures owners have the charge on the company asset. The holder has the right to recover all the unpaid debenture interest and the principal amount along out of the assets mortgaged by the company. On the other hand, an unsecured debenture is the opposite of the secured debentures. Unsecured debentures give the flexibility to the issuing companies but in secured debentures, the holder has the upper hand.

Redeemable and Non-Redeemable Debentures

Debentures are redeemable after a fixed period. On the expiry date of the debenture, the owner or the holders are paid the principal amount. On the other hand, non-redeemable debentures are not redeemable in the company’s lifetime. This type of debenture is only payable to the holder when the company faces liquidation. Non-redeemable debentures are not seen that much in modern days because of its feature of being not redeemable in a short period.

Convertible and Non-convertible Debentures

Convertible debentures are a bit different than others. This type of debenture is convertible to share after a certain period. All the terms and conditions to convert a debenture to share is informed to the holder at the end of the maturity period. On the contrary, Non-convertible debentures cannot be convertible at any cost. At the end of the maturity period, the holder cannot convert their debentures to shares.

First Debentures and Second Debentures

First debentures are one of the most preferred debentures to the holders. Because the holders of this type of debenture are the ones who get repaid. Other debentures holders have to wait for the companies to repay the first debentures holders. Second debenture holders get repaid when first debentures holders are redeemed. After both types are repaid, other holders get redeemed.

The Bottom Line

Debentures allow the holders to invest their lazy money and companies get a chance to expand their business. Most of the time companies issue debenture when they don’t want to expand their ownership, yet in need of funds to achieve a certain goal. The process of issuing debentures is easy, fast, and reliable which makes it more appealing to the companies. The holders get their part of the interest without facing a hassle that they would have faced in the stock market. So it can be said that debentures but both the issuer and the holder in a win-win situation.

Resources

• https://indianmoney.com/articles/types-of-debentures
• https://www.toppr.com/guides/principles-and-practices-of-accounting/issue-of-debentures/meaning-of-debentures-and-their-features/