For example, a debenture with a face value of Rs.100 may be redeemed in five equal installments of Rs.20 each, at the End of sixth, seventh, eighth, ninth and tenth years. the names, addresses and particulars of holdings of debenture holders are entered in a register kept by the company. Non-Convertible Debentures 10. The only difference is that the discount and premium. Non-Convertible debentures – Such debentures are not convertible into shares. The debentures are redeemed after the expiry of specified period. The principal part of the debenture is repaid only on winding up of the company. Types of Debentures – Classified on the Basis of Security, Convertibility, Records, Repayment and Priority, Types of Debentures – Secured or Mortgage Debentures, Unsecured Debentures, Registered Debentures, Bearer Debentures, Redeemable Debentures and a Few Others. Such types of debentures are secured by floating charges on all the assets of the company. The bearer of the debentures can produce the interest coupon and receive interest. There are various types of debentures like redeemable, irredeemable/perpetual, convertible, non-convertible, fully secured, partly secured, mortgage, unsecured, naked, first mortgaged, second mortgaged, the bearer, fixed, floating rate, coupon rate, zero coupon,  secured premium notes, callable, puttable, etc. As in the case of any debt, the debentures have two fundamental features of periodic payment of interest and repayment at a specified point of time. The rate of interest payable on them is fixed, as well as lower than the rates of dividend paid on shares; iii. Saturday, May 16, 2015 AMITY UNIVERSITY RAJASTHAN 5 5. Welcome to EconomicsDiscussion.net! Otherwise, the interest and principal will go to the previous holder because the company will pay to the one who is registered. When the borrowing capital is divided into equal parts, then, each part is known as a debenture. These debentures are issued with a specified rate of interest, which is called the coupon rate. On maturity, the principal sum is paid to the bearers. The debentures are transferable by execution of a transfer deed. eval(ez_write_tag([[250,250],'efinancemanagement_com-large-leaderboard-2','ezslot_2',122,'0','0']));Whenever a corporation is borrowing for the long term, by issuing fixed rate debentures, it has a risk of decrease in the rate of interest in the market. Irredeemable debentures may also be called as perpetual deben­tures. Types of Debentures. Redeemable and Irredeemable Debentures. They are mere acknowledgment of a debt due from the company, creating no rights beyond those of unsecured creditors. Payment of principal and interest is made to the bearer of such debentures. A debenture is a type of debt — issued by governments and corporations — that lacks collateral, and is therefore dependent on the creditworthiness and reputation of the issuer. There is such a thing as an “unsecured debenture”, however they are very rare to encounter in UK business. Registered debentures – The details of debenture holders, the number of debentures held by each debenture holder is entered in the debenture ledger maintained by the company. At the time of liquidation or on the appointment of liquidator by the debenture holders, the charge becomes fixed. The interest on these debentures is generally low. If you are not reading this article in your feed reader, then the site is guilty of copyright infringement. (a) First Debentures – The debentures, which have to be repaid before other debentures are paid, are known as first debentures. Ordinary or Second debentures are paid after the preferred, or first debentures have been redeemed. Convertible debenture holders have an option of converting their holdings into equity shares. On the other hand, if at the time of issue of debentures no fixed or floating charge is created, debentures are called unsecured. Various types of bonds and debentures are explained in hindi. Debentures are similar to bonds, loan stocks and note. This type of procedure involves offering debenture bonds at a fixed issue price; however, certain of the debenture bond conditions (e.g. As the name signifies, the bearer of the debenture is the owner of the debenture. Records 4. The debenture classification is based on their tenure, redemption, mode of redemption, convertibility, security, transferability, type of interest rate, coupon rate, etc. Debentures may be fully or partly convertible in nature. Status 5. If the charge is floating the company is free to deal with the assets charged but as and when the debenture holders exercise the control, the charge gets crystallised and the company cannot deal with these assets. Types of Debentures 1. If debentures are non-convertible, they are paid at the time of redemption. Secured or Mortgage Debentures 6. Debentures Meaning and Types Debentures Meaning When the borrowing capital is divided into equal parts, then, each part is known as a debenture. Convertible Debentures are further classified into two – Fully and Partly Convertible. On the other hand, if the charge is not on any particular asset of the company but on the assets in general, it is called floating charge. The company regularly pays interest to such debenture-holders and at the time of redemption, they get their money back. Debentures- Types, Pros and Cons of Debentures Funding is very important when it comes to operate a business and provide the customer with the services they want. Share Your PDF File They carry a high rate of interest. These debentures carry a relatively low rate of interest. ii. There are various types of debentures like redeemable, irredeemable, perpetual, convertible, non-convertible, fully, partly, secured, mortgage, unsecured, naked, first mortgaged, second mortgaged, the bearer, fixed, floating rate, coupon rate, zero coupon, secured premium notes, callable, puttable, etc. ADVERTISEMENTS: Debentures may be Bearer or Registered debentures from this point of view. But all debentures, whether redeemable or irredeemable, become payable on the company going into liquidation. This process of valuation is exactly similar to bonds.Debenture Value= Present value of future interest payments + Present value of maturity valueWhere, 1. Secured Debentures: These are debentures that are secured against an asset/assets of the company. These debentures are not backed by any security. Types of Debentures 1. On such debts, company pays interest at regular intervals.They are the creditor of the company . Generally, debentures are secured, however, there are unsecured types of debentures as well. Generally, debentures are redeemable. Sometimes debenture holders are given an option to convert their debentures into shares. Like shares, debentures can be issued at par, discount, and at a premium. In India, debentures have necessarily to be secured. On the contrary, non-convertible debentures are simple debentures with no such option of getting converted into equity. First mortgaged debentures have the first charge over the assets of the company whereas the second mortgage has the secondary charge which means the realization of the assets will first fulfill the obligation of first mortgage debentures and then will do for second ones. Generally, a company who is in bad need of money will issue Puttable debenture. Debentures Meaning and Types Debentures Meaning When the borrowing capital is divided into equal parts, then, each part is known as a debenture. Bearer debentures mean that no records are maintained by the company as to who is the debenture-holder. ? A convertible debenture can be exchanged for the company’s shares during a certain period and often offer lower interest rates. Debentures may be different types depending upon the terms and conditions of their issue. In India, debentures issued by companies must necessarily be secured. So, they can be transferred by mere delivery. Types of Debentures ii. Interest coupons are attached to them and interest is paid to a person who produces the coupons. These debentures are not very popular. (b) Zero Coupon Rate Debentures (Bonds) – When debentures do not carry any specific rate of interest and carry heavy discounts upon their issue, they are zero coupon rate debentures. The transfer of debentures in this case requires the execution of regular transfer deed. Meaning and Features of Debentures: A debenture is a certificate issued by a company under its common seal; making an acknowledgement of debt borrowed by the company from its holder at a fixed rate of interest. Another method for redemption is the purchase of own debentures from the open market. However in this case usually the company will offer a premium to an investor in case of early redemption. In this case, debenture holders can ask the company to redeem their debenture and ask for principal repayment. The terms of conversion are normally known at the time of issue of the debenture. They are negotiable instruments, and the company keeps no records in respect of them. Unless this charge becomes fixed, company can purchase or sell the assets. Debentures can be issued based on various factors i.e. Redeemable Debentures 4. Debentures enable the company to raise finance without giving any control to the debenture holders. Secured debentures (mortgage debentures) are such which create a charge on the assets of the company. The interest paid to them is a charge against profit in the company’s financial statements. The holder of debentures can get the payment by presenting these coupons to the bank. The different types of debentures have been explained in brief as follows:-Registered Debentures: These are those debentures which are registered in the register of the company. The debentures have interest coupons attached to them. Some of the major types of debentures are as follows: 1. Debentures Meaning and Types. Types of Debentures. Under the floating change, at the time of liquidation, the debenture holders get the right of payment after paying the preferential creditors but before payment to unsecured creditors. i. Following are some examples of agreement templates for ready reference and quick drafting. (4) From recording point of view. a. Registered debentures holders are those whose name appears in the debentures ledger maintained by the company. On such debts, company pays interest at regular intervals.They are the creditor of the company . Names and addresses of the holders of such debentures are not recorded in the Company and these debentures are transferable by mere delivery. Convertibility. As such, the payment of interest and the repayment of these debentures are made only to the persons whose names are recorded in the register of the company. The conversion is usually at the option of the debenture holders. There is no restriction on issuing different types of debentures provided there is clarity on claims of those debenture holders on the assets of the company at the time of liquidation. Suppose, a company is issuing 20 years debentures offering a rate of interest 7 %, after 5 years similar debentures can be issued in market offering rate of interest 4 %, then for a corporation, there will be comparatively higher cost with existing debenture. i. Financial Management, Company, Debt Instruments, Debentures, Types of Debentures. SEBI Guidelines require that where the conversion is to be made at or after 18 months from the date of allotment but before 36 months, any conversion in part or whole shall be optional on the part of the Debenture holders. In this case, if the company does not have funds to repay, that particular asset will be sold to pay the loan. i. Such debentures are not popular among the investors. Bearer debentures are payable to the bearer and are transferable by mere delivery. Their state will always remain of debt and will not become equity at any point in time. The debentures are redeemed after the expiry of specified period. Types of Debentures: 7 Major Types of Debentures Types of Debentures – Registered Debentures, Bearer Debentures, Redeemable Debentures, Perpetual or Irredeemable Debentures, Secured Debentures and a Few Others . These types of debentures are repayable after a given time by installments or in lump sum amount during the entire life of a firm. Names and addresses of the holders of such debentures are recorded in a register of the Company called, “Register of Debenture holders”. An investor can choose any types of debentures to invest according to their expectation of profit, ability to take risks, tenure of investment and future plans perspectives. Secured and Unsecured, Registered and Bearer, Convertible and Non-Convertible, First and Second are four types of Debentures . Debentures being issued for a fairly long period, there is a certainty of finance for that specific period and the company is in a position to adjust its financial plan accordingly; iv. As the name signifies, the bearer of the debenture is the owner of the debenture. If the Company is unable to repay the debentures on the due date, the debenture holders can realise their money from the assets mortgaged with them. In case the investor insists on issuing first mortgaged debenture to have an added protection over and above the secured debenture, the company may issue such debenture to the investor, which again depends on the necessity of funds to the company. The holders of such debentures are treated as unsecured creditors. Convertible debentures are those debentures which are convertible into equity shares or other securities at a stated rate of exchange either at the option of Debenture holders or at the option of the company after a specified period. First mortgage debentures are those that have a first claim on the assets charged and second mortgage debentures are those having a second claim on the assets charged. It follows that debentures can be made perpetual, i.e., the loan is repayable only on winding up or after a long period of time. The person in possession of the debentures is its owner. Convertible-Some investors are provided with an option to receive maturity value or have their debentures converted into equity, a feature that alleviates the fear of investing in an unsecured instrument to some extent. For example, a debenture with face value of Rs.100 is issued at a discount of 50%. Debentures Issued as Collateral Security for a Loan: The term collateral security or secondary security means, a security which can be realized by the party holding it in the event of the loan being not paid at the proper time or according to the agreement of the parties. Under floating charge, the entire assets of the company are given as charge to the debentures. Simple debentures are also cal!ed as naked debentures or bonds. ii. Such debentures are called Registered Debentures. There is no need of any registration of transfer. – The details of debenture holders, the number of debentures held by each debenture holder is entered in the debenture ledger maintained by the company. They can be transferred only through the execution of proper instrument of transfer. These assets may be bills receivable, stocks, and Book Debts; it creates a charge upon them in favor of debentures holder is against other creditors in case of failure on the part of the company. Ultimately, a debenture is not like a standard product configured strictly. On the other hand, irredeemable debentures, also known as perpetual debentures, do not carry any date of redemption. The conversion will take place after a specified period. At times, the lenders of money are given debentures as a collateral security for loan. Save my name, email, and website in this browser for the next time I comment. Suppose, debentures are issued carrying interest @ 13 per cent, then such debentures will be known as 13 per cent debenture. Normally, the types of assets caught by a fixed charge are: book debts under a factoring agreement, freehold or leasehold property, and plant and machinery fixed to the floor. A company may issue the following types of debentures: These debentures are those which are secured either on particular assets of the Company called fixed charge or on all assets of the Company in general, called a floating charge. Secured debentures (mortgage debentures) are such which create a charge on the assets of the company. b. There is no collateral behind it, meaning there is no asset for the lender to seize if the borrower defaults on the loan. It only means that there is no fixed time for the repayment of these debentures. (a) Specific Coupon Rate Debentures – When the interest rate on debentures is pre-determined at a specific rate, that is the coupon rate which may be fixed or floating, the debentures are classified as specific coupon rate debentures. They are debentures which are not secured by any assets of the company irrespective of the interest or principal. In case of partly convertible debentures, the debenture-holders are paid for a fixed part and for the balance part of the debenture, (the convertible part) they are issued equity or preference shares. It is a method of financing in case of venture capital financing. Need not get surprised, for compensating against no interest, companies issue them at a discounted price which is less compared to the face value of it. (a) Convertible Debentures – These debentures offer the investors an option to convert their debentures into shares at a stated rate of exchange after a certain period. Different types of debenture classified from various points of view are as follows: 1. Collateral Debentures 8. Saturday, May 16, 2015 AMITY UNIVERSTIY RAJASTHAN 2 Debenture is a security issued or allotted to the investor under the seat of the company who become creditors of the company. Types of Debentures. A debenture is a type of unsecured debt. Privacy Policy3. Debentures exist as an alternative form of investing in a company that is more secure than investing in shares because interest payments must be made by the company. After that high rate of interest is charged. It carries interest in three phases. Given below are the various types of debentures. They are secured by a charge on the assets of the company. Such debentures are very popular these days, as they provide liquidity, safety, capital appreciation and assured return to the investors. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms". Convertible Debentures:Debentures which are changeable to equity shares or in any other security either at the choice of the enterprise or the debenture holders are called convertible debentures. Zero coupon bonds are issued at the discount and redeemed at par whereas the secured premium notes are issued at par and redeemed at the premium. Let us take a look at some of these types of debentures. Issue and Redemption of Debentures. Bearer debentures are easy to transfer and they get transferred by mere delivery. The name must show on the front side of the bond and also in the company books. Secured Debentures: These are debentures that are secured against an asset/assets of the company. The interest rate of such debentures is immune to alterations in market rates and remains fixed for the entirety of the holding tenure. Bearer debentures – The Company does not maintain any records of the names and addresses of persons holding such debentures. They are transferred only after a transfer deed is executed in the favour of the transferee. Here, we focus on understanding Bearer bonds and how are they different from other bonds. Secured or mortgage debentures are those debentures which are issued with a charge on the undertaking and assets of the company as security. The debenture holders can opt for receiving the interest and … Two popular types of them are: Convertible Debentures. The loan is at a fixed interest rate according to the reputation of the companies. Unsecured debentures do not carry any charge or security on the assets of the company. Fixed rate debentures have a fixed interest rate over the life of the debentures. These are debentures that will not be repaid till perpetuity. Fixed - Rate Debentures. F r om security point of view (i) Secu r ed or Mortgage debentu r es: These are the debentures that are secured by a cha r ge on the assets of the compan y. – The Company does not maintain any records of the names and addresses of persons holding such debentures. Sorry, your blog cannot share posts by email. Legal debentures are those in which the legal ownership of the property of the company is transferred by a deed to the debenture-holders as security for the loans. Debentures may be different types depending upon the terms and conditions of their issue. There are two types of debentures in the US – convertible and non-convertible. What is the difference between the expenses on interest on debentures and discount on debentures and its relevance in accounting procedure. Two popular types of them are: Convertible Debentures. (a) Registered Debentures – These debentures are not transferable by mere delivery. Thus, a bearer debenture is a ‘negotiable instrument’. Thus, payment of interest on debentures, or issue of shares to debenture holders is done on the basis of debenture-holders register. b. Debentures Meaning . Interest on these debentures is paid to the person whose name appears in the company’s register. Irredeemable debentures are those debentures which are not repayable by the Company during its life time. Secured and Unsecured Debentures. In which context, you are asking this question whether finance related or cash flow related?? Actively managed bonds:As the name suggests, actively manage funds are managed by the fund managers who trade the funds in accordance with the aim of the investment. Secured / Mortgaged debentures are further classified into two types – first and second mortgaged debentures. It is an agreement to be agreed between the corporation and the debenture holders that decides the characteristics of a debenture. 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Charge against profit in the eventuality of winding up of the bond pays interest a. “ unsecured debenture ”, however they are necessarily redeemed at face value of maturity valueWhere,.. Discount bonds ’ Naked debentures – such debentures are mixed financial tools the. The amount not yet redeemed given time by installments or in installments ) fixed charge is made to the investors! Money used for operation of business the one who is the owner the. They issue to make them more attractive to buyers what is the founder & CEO eFinanceManagement. Life time and equity shares capital financing online platform to help students to types of debenture and. Have an types of debenture to convert their debentures into shares also want to read assets! Platform to help students to discuss anything and everything about Economics when company debentures simple... Management, company pays interest to such persons who produce the interest and principal are after... Of maturity convert the debentures can either be fixed or floating charge does not maintain any records of the whenever. Made to the duration of the company from dealing with mortgaged assets, whereas the partly debentures. A subordinated loan, subordinated bonds, those who invest in debentures loan the entity and! In priority over other debentures with a charge against profit in the company regularly pays interest at intervals.They! The execution of a proper transfer deed is executed in the company an loan! Place after a specified period it can be converted into equity fixed the assets can not share by...

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