What is meant by a debenture? Explain the different types of debentures?
Debenture refers to a long term instrument that companies use to borrow money from the market. It is the acknowledgement of a debt that is taken by a company. There are many types of debentures based on the nature which are:
1. Based on tenure
i. Redeemable Debenture: Debentures that have a specific date of redemption that is mentioned on the certificate and the company is bound to pay the person/persons holding the debenture, the principal amount on that date.
ii. Perpetual/Irredeemable Debenture: Debentures that do not mention a specific date for redemption. The only way these can be redeemed is when the company is liquidated.
2. Based on Convertibility
i. Convertible Debenture: Those type of debentures that have the flexibility to convert into equity shares. The terms and conditions governing the conversion are clearly mentioned at the time of issue of debenture.
ii. Non-Convertible Debenture: These are debentures that do not have any special features and are not converted into equity shares.
3. Based on Security
i. Mortgage Debenture: A type of debenture that is backed by some asset or assets and such asset can be used to recover funds in case
ii. Naked Debenture: Debenture that is issued basing solely on the basis of credibility of the issuer.
4. Based on Priority
i. First Debenture: Also known as preferred debenture. These debentures are the first to be paid in case of winding up of a company.
ii. Second Debenture: These are ordinary debenture and are paid after the first debenture.
5. Based on registration:
i. Registered Debenture: Debentures that are registered with the age, name, address etc. are added and to the debenture.
ii. Bearer Debenture: These debenture are transferred by delivery to the new holder.