11 Types of Debentures: definition in general

There are various types of debentures, which probably used now days for raising finance. But before moving towards the varieties of debentures, let’s see what is debenture? The expression debenture comes from the Latin word “debere” meaning to a money owing. A business might increase part of its funds by obtaining loans. The short term funding is largely fulfilled by the company from the banks in the kind of overdrafts and cash credits. The extended terms finance may be increased by issuing of debentures. A debenture thus is a long-term fund raised by a business through public borrowing.

Types of Debentures

Debenture definition
In corporate finance, a debenture is a medium to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest. The legal term “debenture” originally referred to a document that either creates a debt or acknowledges it, but in some countries the term is now used interchangeably with bond, loan stock or note.

Debentures are generally freely transferable from the debenture holder. Debenture holders don’t have any rights to vote at the organization’s general meetings of shareholders, but they may have separate votes or meetings e.g. on changes to the rights connected to the debentures. The interest paid to these is a charge against profit in the business’s financial statements.

The term “debenture” is much more descriptive than definitive. An exact and all-encompassing definition for a debenture has proved elusive. The English commercial judge, Lord Lindley, especially commented in 1 case: “Now, what the correct meaning of ‘debenture’ is I don’t know. I do not find anyplace any exact definition of this. We are aware that there are various kinds of instruments commonly known as debentures.

Types of Debentures :

  1. Redeemable and Irredeemable (Perpetual) Debentures
  2. Convertible and Non-Convertible Debentures
  3. Fully and Partly Convertible Debentures
  4. Secured (Mortgage) and Unsecured Debentures
  5. First Mortgaged and Second Mortgaged Debentures
  6. Registered Debentures and Bearer Debenture
  7. Fixed and Floating Rate Debentures
  8. Zero Coupon and Specific Rate Debentures
  9. Secured Premium Notes / Debentures
  10. Callable and Puttable Debentures / Bonds
  11. Subordinated Debenture

1.Types Of Debentures On The Basis Of Record Point Of View

  • Registered Debentures
    These are the debentures that are registered with the company. The amount of such debentures is payable only to those debenture holders whose name appears in the register of the company.
  • Bearer Debentures
    These are the debentures which are not recorded in a register of the company. Such debentures are transferable merely by delivery. Holder of bearer debentures is entitled to get the interest.

2. Types Of Debentures On The Basis Of Security

  • Secured Or Mortgage Debentures
    These are the debentures that are secured by a charge on the assets of the company. These are also called mortgage debentures. The holders of secured debentures have the right to recover their principal amount with the unpaid amount of interest on such debentures out of the assets mortgaged by the company.
  • Unsecured Debentures
    Debentures which do not carry any security with regard to the principal amount or unpaid interest are unsecured debentures. These are also called simple debentures.

3. Types Of Debentures On The Basis Of Redemption

  • Redeemable Debentures
    These are the debentures which are issued for a fixed period. The principal amount of such debentures is paid off to the holders on the expiry of such period. These debentures can be redeemed by annual drawings or by purchasing from the open market.
  • Non-redeemable Debentures
    These are the debentures which are not redeemed in the life time of the company. Such debentures are paid back only when the company goes to liquidation.

4. Types Of Debentures On The Basis Of Convertibility

  • Convertible Debentures
    These are the debentures that can be converted into shares of the company on the expiry of pre-decided period. The terms and conditions of conversion are generally announced at the time of issue of debentures.
  • Non-convertible Debentures
    The holders of such debentures can not convert their debentures into the shares of the company.

5. Types Of Debentures On The Basis Of Priority

  • First Debentures
    These debentures are redeemed before other debentures.
  • Second Debentures
    These debentures are redeemed after the redemption of first debentures.