In corporate finance, debentures are a common financial instrument companies use to raise capital. The Companies Act of 2013 defines debentures broadly, covering various types of debt securities. These debentures come with distinct features and characteristics that make them suitable for different financing needs.
This article explores the different kinds of debentures under the Indian Companies Act of 2013 and helps you understand their key features.
Meaning of Debentures
As per section 2(30) of the Companies Act, 2013, the term “debenture” is defined broadly to include the following:
Debenture Stock: This refers to a type of long-term debt instrument issued by a company to raise funds. Debenture stock represents a loan taken by the company from the public or investors, and it acknowledges the company’s debt obligation to the debenture holders. Unlike regular debentures, debenture stock is not issued with specific maturity dates but for a perpetual or long-term period.
Bonds: Bonds are another form of long-term debt securities issued by companies to raise capital. They are similar to debentures but may have specific features, such as more extended maturity periods and fixed or variable interest rates, and may be traded in the secondary market.
Any Other Instrument Evidencing a Debt: This part of the definition covers any other financial instrument or security issued by a company that represents a debt obligation. It could include instruments with different names or characteristics as long as they evidence a debt owed by the company.
Features of Debentures
- Debenture is considered a loan document because it acknowledges a debt.
- Debenture is in the form of a certificate issued under the company’s seal called a Debenture Deed.
- Debenture holders get a fixed rate of interest.
- Debenture holders will receive interest whether the company generates profit or loss.
- Debentures have a specific maturity date, which is the date when the principal amount is due to be repaid to the debenture holders.
Types of Debentures
Here are four important kinds of debentures under the Companies Act of 2013 that you should know about.
1. Registered and Bearer Debentures
Registered debentures are types of debentures in which all details of the debenture holder, like addresses, names and particulars, are filed in a register, which the enterprise keeps.
Bearer debentures are a specific kind of debenture that can be transferred only through physical delivery, and the company does not maintain any records of the debenture holders.
2. Secured and Unsecured Debentures
Secured debentures are types of debentures that are secured by charges created on assets of the enterprise. The charge can either be fixed or floating.
Unsecured debentures are types of debentures that are not secured by creating a charge on the assets of the enterprise.
3. Convertible and Non-Convertible Debentures
Convertible debentures are types of debentures that can be converted into equity shares or any other security.
Non-convertible debentures are types of debentures that cannot be converted into equity shares or any other security.
4. Redeemable and Irredeemable Debentures
Redeemable debentures are debentures with a fixed maturity date and are repayable to the debenture holders by the issuer on or after that date.
Irredeemable debentures are types of debentures that do not have a fixed maturity date. They do not come with an obligation for the issuer to repay the principal amount to the debenture holders at any specific time.
Conclusion
The Companies Act, 2013, defines various types of debentures that offer companies flexible financing options and provide investors with diverse investment opportunities.
Understanding these types of debentures allows companies to tailor their funding strategies, while investors can make well-informed decisions based on their preferences and risk appetite. Debentures play a significant role in promoting capital flow and fostering growth in the corporate sector.
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