According to the Companies Act 1956 “ Debenture includes debenture stock, bonds and any other securities of company, brother constituting a charge on the assets of the company or not”. Debentures are generally issued by the private sector companies as a long term promissory note for raising loan capital. The company from sister to pay interest and principal as stipulated. Bond is an alternative form of debenture in India. Public sector companies and Financial institutions issue bonds.
Characteristic features of debentures
The main characteristics feature of debentures are listed below:
1. Form: it is given in the form of certificate of indebtedness by the company specifying the debt of redemption and interest rate.
2. Interest: the rate of interest is fixed at the time of issue pixel which is known as contractual or coupon rate of interest. Interest is paid as a percentage of the par value of the debenture and may be paid anually, semi-annually or quarterly. The company has the legal binding to pay the interest rate.
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Types of debentures
Debentures are classified on the basis of the security and convertibility:
1. Secured or unsecured
2. Fully convertible debenture
3. Partly convertible debenture
4. Non convertible debenture
Secured or unsecured debentures: a secured debenture is secured by a lien of the companies specific assets. In the case of default the trustee can take hold of the specific asset on behalf of the debenture holders. In the Indian market secured debentures have a charge on the present and future immovable assets of the company.
When the debentures are not protected by any security they are known as unsecured or naked debentures. In the American capital market debenture means unsecured bonds while bonds could be secured or unsecured. Unsecured debentures find it difficult to attract investors because of the risk involved in them. Generally the benches are treated by the credit rating agencies.
Fully convertible debenture: this type of debenture is converted into equity shares of the company on the expiry of specific period. The conversion is carried out according to the guidelines issued by SEBI. The FCD carries lower interest rate than other types of debentures because of the attractive feature of convertibility into equity shares.
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