Brief explanation of various types of Debentures

Types of Debentures

There are several types of the debentures on the basis of the terms and conditions of the issue of the debentures. Let us now proceed to discuss the different classes of debentures.

Debentures on the basis of Registration

1. Registered Debentures: The debentures which are payable to the registered debenture holders are called registered debentures. The names of the holders of these debentures with details of the number, value and type of debenture held are recorded in the register of debenture holders. Registered debentures are not negotiable instruments. Transfer of such debentures requires registration.

2. Bearer Debentures: Bearer debentures are those which are payable to the bearer.The register of debenture holders does not have the names of the debenture holder recorded. Hence they are transferable by mere delivery. Registration of transfer is not necessary. Bearer debentures are also called as Unregistered Debentures.

Debentures on the basis of Security

1. Secured Debentures: The debentures, which are secured fully or partly by a charge over the assets of the company are called secured debentures. The charge may be either a fixed charge.or a floating charge. The charge, when created should be registered with the Registrar within 30 days of its creation.

2. Unsecured Debentures: The debentures, which are not secured fully or partly by a charge over the assets of the company are called unsecured debentures. The general solvency of the company is the only security for the holders. The debenture holders are treated as only unsecured creditors.

Debentures on the basis of Redemption

1. Redeemable Debentures: The debentures, which are repayable after a certain period, are called redeemable debentures. Sometimes, they can be redeemed by the company on demand by the holders or at the discretion of the company.

2. Irredeemable Debentures: The debentures, which are not repayable during the life time of the company, are called irredeemable debentures. The company may repay the money at the time of liquidation or on the happening of a contingency or on the expiration of a longer period or when the company breaches the terms of issue of the debentures.

Debentures on the basis of Conversion

1. Convertible Debentures: The debentures, which are convertible into equity shares or preference shares at the option of the holders, after a certain period, are called convertible debentures.

2. Non-Convertible Debentures: The debentures, which are not convertible into equity shares, are called non-convertible debentures.

Debentures on the basis of Priority

1. Preferred Debentures: The debentures, which are paid first at the time of winding up, are called preferred debentures or first debentures. Thus they are just like preference shares.

2. Ordinary Debentures: Debentures, that are paid after the preferred debentures during the winding up of a company are called ordinary debentures.

Debentures on the basis of Status

1. Equitable Debentures: Debentures, that are secured by deposit of title deeds of the property with a Memorandum creating a charge, are called equitable debentures. In this case, the property is with the company.

2. Legal Debentures: The debentures, which are secured by actual transfer of the legal ownership of the property from the company to the holder, are called legal debentures.

Debentures with Pari Passu Clause

The (secured) debentures, which are discharged ratably, though issued at different dates, are called debentures with pari passu clause.

Debenture Trust Deed

When a company issues mortgage debentures, it is a common practice to secure them by means of a Trust Deed conveying the company’s property to the trustees to be held in trust for the benefit of the debenture holders. The trust deed contains the conditions governing the rights of the debenture holders and the relationship between them and the company. The trustees hold the property in trust for the debenture holders and safeguard their interests.

The trustees must act diligently and honestly in the discharge of their duties. Any clause in the trust deed, which, exempts them from liability for breach of their duty as trustees, is void.

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