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Unit 6: Debentures: Concept, Types, Issue

6.1 Meaning Notes

When a company desires to borrow a huge amount of money for a long period, it can obtain the
same from financial institutions as IDBI or ICICI, or from the general public. A company can
obtain a long-term loan from general public by issuing debentures. A debenture may be defined
as a written instrument acknowledging a debt by a company under its carmon seal to some
person or persons. It is a bond by a company and is offered to the public by means of a prospectus
containing the terms and condition for repayment of the principal sum and for payment of
interest at a fixed rate. It may or may not be secured by a charge on the company’s assets. Section
2 (12) of the Companies Act defines the term: “debenture includes debenture stock, bonds any
other securities of a company whether constituting a charge on the assets of the company or
not”. In fact this is no definition and hardly tells us what the term debenture really means. In
simple words, a debenture is a certificate that:
1. acknowledges that company has taken a stated loan from a person/persons named in the
certificate and this amount will be redeemed on a specified date or on the expiry of a
stipulated period.

2. contracts to pay a fixed rate of interest periodically to the person named in the certificate.
Usually, the rate of interest is prefixed for the debentures as 10% debentures.
3. gives the details of the security.

6.2 Kinds of Debentures

Debentures can be classified into different categories on the basis of following characteristics:
1. Permanence or redemption: On the basis of permanence or redemption, debentures can be
classified into two:
(a) Redeemable debentures: These are those debentures which are redeemed/repaid either
at the expiry of a specific period or within a period by the company. The redemption
of these debentures takes place either by annual drawings in lump sum or by purchase
in the open market at any time at the prevailing rate in the market.
(b) Irredeemable or perpetual debentures: In this case, the company does not fix any date for
repayment of debentures. The holder of these debentures cannot demand payment
from the company during its lifetime. Generally, the debentures are repayable after
a long period or on liquidation of the company.
2. Security: On the basis of security, debentures can be classified into two:
(a) Secured or mortgage debentures: These are those debentures which are secured by a
charge on the assets or properties of the company. When the charge is of a particular
assets, such as land or buildings, it is called a fixed charge. When the charge is on all
the fee assets of the company, it is called general charge or floating charge. The
terms of debentures or trust deed will decide the rights of the debenture-holders in
the case of default of a company.
(b) Naked or simple debenture: Those debentures which carry no security are unsecured.
The debenture-holders of these debentures have no priority over other creations of
the company. Their position is equal to that of unsecured creditors.
3. Priority in payment: On the basis of priority in payment of interest and principal amount
of debenture, they can be classified into:

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