Debentures for CS Executive Course
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What is Debenture?
As per Section 2 (30) of Companies Act, 2013
“Debenture” includes debentures, stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.
In other terms,
A Debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general credit worthiness and reputation of the issuer.
Debentures can be classified into different categories on the basis of:
- Convertibility of the instrument
- Security of the instrument
- Redemption Ability
- Registration of Instrument
Classification on the basis of “CONVERTIBILITY”
- Non-Convertible Debentures (NCD): These instruments retain the debt character and cannot be converted into Equity shares. Therefore, they will be redeemed or roll over for a further period.
- Partly-Convertible Debentures (PCD): A part of these instruments are converted into Equity shares in the future at the notice of the issuer. The ratio for the conversion is decided by the issuer at the time of subscription.
- Fully-Convertible Debentures (FCD): These instruments are converted into Equity shares in the future at the notice of the issuer. The investor enjoys the same rights as an ordinary shareholder after conversion.
- Optionally Convertible Debentures (OCD): Investor has the option either to convert these debentures into equity shares.
For a detailed explanation of Classification on the basis of “CONVERTIBILITY”, CS Executive Course classes.
Classification on the basis of “SECURITY”
- Secured Debentures are debentures secured by a charge on the fixed assets of the issuer company. When the issuer company fails on payment of either the principal or interest amount, the assets of the company can be sold to repay the liability to the investors.
2. Unsecured Debentures are debentures that are not supported by collateral security. No specific assets will be set aside against unsecured debentures. It is basically a loan without any protection. They are backed only by the general creditworthiness of the issuer.
Classification on the basis of “REDEMPTION ABILITY”
- Redeemable Debentures are those which can be redeemed on a fixed date or by giving notice to the debenture holders at the option of the company.
- Irredeemable or Perpetual debentures are those which are not repayable at any time by the company during its existence. No date of redemption is specified. The debenture holders cannot claim their redemption. However, after the commencement of the Companies Act, 2013, a company cannot issue perpetual or irredeemable debentures.
Classification on the basis of “REGISTRATION”
- Registered Debentures: Registered debentures are registered in the name of a particular person, the name appearing on the debenture certificate and in the Register of Debenture holders of the company. These are transferable through execution of an “Instrument of Transfer i.e. FORM SH-4” duly stamped and executed and the conditions as specified in Section 56 of the Companies Act, 2013.
- Bearer debentures: on the other hand, are transferred by mere delivery without any notice to the company just like a negotiable instrument. The Company keeps no record for such debentures. The person “holder in due course” of the debentures-certificate can claim principal and interest amount accrued thereon.
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