The term ‘debenture’ is derived from the Latin word ‘debere’, which means to borrow. Debentures are the debt of a company. They include medium to long-term debt or loans that the company avails to raise capital for its operations or expansion.
Published on 23 March 2023
The company has to repay these securities after a fixed tenure, and they have to pay a fixed rate of interest to the lender at specific intervals, usually monthly, quarterly, or annually. Companies that have raised capital through debentures pay the interest on debentures before paying dividends to their shareholders.
This article will illustrate the different kinds of debentures in detail.
Companies issue various types of debentures based upon their needs and objectives. The categorisation of debentures is dependent on their tenure, convertibility, redemption mode, security, coupon rate, etc. Here is a list of the most common types of debentures that the companies issue:
When it comes to convertible debentures, the investors have a right to convert their debentures to equity shares. In most cases, the conversion rate, the rights of the people who hold the debenture, and the date of triggering the conversion are mentioned at the time of issue of debentures.
In this type of debentures, the investor does not have the right to convert their debentures into equity shareholdings of the company.
In this type of debentures, the company issuing the debentures enters all the details of the holding, which include the number of debentures that have been issued, address, and name of the holder, etc., in the register maintained for debentures. In this scenario, if the debenture holder chooses to transfer his shares to other investors, the records are added to the register of debenture holders and the register for transfer of debentures.
These debentures are commonly known as bearer debentures. In such a scenario, the company does not keep any records. The principal amount and the amount of interest on debentures are paid to the bearer of the instrument without any consideration of whose name is written on it. The advantage of such a debenture is that the transfer of this debenture is convenient and easy.
Also Read: Difference between Shares & Debentures
In the case of redeemable debenture, the date of redemption of the principal amount is detailed on the debenture certificate issued by the company. On the redemption date detailed in the debenture certificate, the company is legally mandated to pay back the principal amount to the holder of the debenture.
Unlike in the case of the redeemable debentures, the date of redemption of the principal amount is not fixed when it comes to irredeemable debentures. The debentures continue for an infinite time and the principal amount is returned to the holder only when the company enters into liquidation.
These debentures are secured by some assets or an asset that the debenture holder can liquidate if he requires to do so. Accordingly, the debentures are also categorised into two subcategories: first mortgaged and second mortgaged debentures.
Unlike secured debentures, unsecured debentures are issued by leveraging the reputation and goodwill that the company has generated. As a result, unsecured debentures are commonly known as naked debentures.
Now that you understand the kinds of debentures, it is essential to know the features, importance and uses of debentures.
Here are some important features of debentures:
Advantages of Debentures
Here are some advantages of debentures:
Uses of Debentures
The company issues debentures to raise capital from the public. The capital raised from the debentures is used by the company for various purposes like expansion, growth, and research and development.
Many companies prefer to issue debentures over equity shares because of two main reasons. One is that issuing debt instruments does not lead to liquidation of the ownership of the company. Secondly, the cost of issuing debentures is lesser than the cost of raising capital through the issue of shares.
Thus, these are the various types of debentures that companies can issue to raise capital for expansion and growth. You can add debentures to your portfolio of investments if you think that they suit your needs and risk profile.