Types of Debenture

By

Dr.S.Vijayalakshmi.

Assistant Professor

C.P.A.College,Bodinayakanur

Debenture� �A debenture is a type of long-term debt instrument used by corporations to raise capital.�It is backed by the creditworthiness and reputation of the issuer, not by physical assets.

• Why are Debentures Issued?
• To raise capital for expansion, business operations, or new projects.
• Provides investors with regular interest income, known as coupon payments.

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• Common Features of Debentures:
• Interest Rate: Fixed or floating rate of interest.
• Maturity Date: The date on which the principal amount is repaid.
• Convertible or Non-Convertible: Can be exchanged for equity (shares) or not.

Classification of Debentures Based on Security�

• Secured Debentures:
• Definition: Debentures backed by a charge on company assets.
• Types of Security:
• Fixed Charge: Specific assets are pledged as collateral.
• Floating Charge: General lien on assets that can change over time.
• Risk: Lower risk for investors due to asset backing.
• Unsecured Debentures (Debenture Stock):
• Definition: Not backed by any specific asset but based on the issuer's creditworthiness.
• Risk: Higher risk for investors since they are not secured by collateral.

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Classification of Debentures Based on Convertibility��

• Convertible Debentures:
• Definition: Debentures that can be converted into equity shares of the company after a certain period.
• Advantage: Investors have the option to benefit from the company’s growth by converting the debt into equity.
• Example: A company issues convertible debentures at a fixed interest rate with the option to convert them into equity after 5 years.

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• Non-Convertible Debentures (NCDs):
• Definition: Debentures that cannot be converted into equity shares.
• Advantage: Offers a fixed interest rate, providing investors with predictable income.
• Example: Non-convertible debentures provide interest but do not give any option for ownership in the company.

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Other Classifications of Debentures

Redeemable Debentures:

• Definition: Debentures that the issuer agrees to redeem (repay) at a specified time or after a fixed period.
• Example: A company might issue redeemable debentures with a 10-year maturity, promising to pay back the principal at the end of 10 years.

Irredeemable (Perpetual) Debentures:

• Definition: Debentures that have no maturity date; the issuer is not obligated to repay the principal amount.
• Example: The company pays interest indefinitely, but the principal is never repaid

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Bearer Debentures:Definition: Debentures that are transferable by delivery, and the holder is entitled to interest without being registered.

Risk: High risk due to ease of transferability.

Registered Debentures:

Definition: Debentures whose ownership is recorded by the company. The holder's name is registered, and only they can claim interest payments.

Security: More secure than bearer debentures.

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