Debentures are issued as a way of financing and supporting investments in companies. They are a form of debt instrument and they represent a promise to repay the holder with interest. Debentures can be considered as an alternative to shares. They do not have voting rights, but they provide higher returns than bank savings accounts. This is a complete understanding of meaning and types of debenture.
Topics Discussed in This Article:
- Meaning of Debenture
- Different Types of Debentures
- Why Debenture is Better Than Shares
- How You Can Convert Debentures Into Shares
Companies issue debentures for borrowing borrowing money from investors and promising to pay back the original investment plus interest. This is in contrast to equity securities which give investors ownership rights in the company.
Meaning of Debenture
A debenture is a certificate issued by a company acknowledging debt of a specific amount of public borrowing. It is also considered as a portion of loan capital.
Therefore, a debenture is a loan certificate issuing by a company to it’s holders under the company seal. The company instead of borrowing entire monetary requirement from a financial institution may obtain it from the large section of the general public by issuing certificate acknowledging debts.
Types of Debentures:
A) From Security Point of View
1. Simple or Naked Debenture :- These debentures do not carry any security in repayment of interest and the principal. The debenture holders are treated as unsecured creditors. These debentures are not in use these days.
2. Secured or Mortgaged Debentures:- These debentures are secured by a charge on the assets or property of a company. They may be fixed charge or floating charge. Under this, debenture holders can realize their money from the assets mortgaged with them, If a company fails to repay the amount of debentures on its due date. Generally, the debentures issued by a company must be secured.
B) From Redemption Point of View
1. Redeemable Debentures:- These of a certain debentures are to be redeemed after the expiry period in lump sum basis or by annual drawing or by purchase of own debentures from the open market depending upon the terms of issues.
2. Irredeemable Debentures:- These debentures are not repayable during the lifetime of the debentures. However, they can be repaid only on the termination of the company. These debentures are not in use these days.
C) From Recording Point of View
1. Bearer Debentures:- These debentures are transferrable. It is not necessary to register these debentures. The company pays interest on such debentures to the holders who produce the interest coupon attached to this.
2. Registered Debentures:- Debentures are made out in the name of a particular person who is registered by the company as a holder and transferable like shares. Interest on such debentures is paid to the person whose name is stated in the register of the company.
D) From the Conversion Point of View
1. Convertible Debentures:- When debenture holders are given an option to convert their debentures into shares or new debentures of the company then such debentures are called convertible debentures. These debentures are very popular in these days.
2. Non-convertible Debentures:- Debenture holders having no option to convert their debentures into shares or new debenture then such debenture is called non-convertible debenture.
E) From Priority Point of View
1. First Debentures:- These debentures are paid fist before any payment is made to other debentures.
2. Second Debentures:- These debentures are paid after the first debentures.
So, this much is for this article. Our today’s discussion was on meaning and types of debentures. Fell free to as questions in comment box below if you have any confusion. Thank You !
Why Debentures is Better Than Shares
Debentures are the future of investing. The world is changing and so are the ways in which we invest. We don’t just invest in shares anymore, we invest in debentures. Debentures are a safer investment that gives you more control and power over your money.
- Debentures are often seen as better than shares because they offer fixed interest rates and have no voting rights. This means that the issuer has more control over them, which is advantageous for investors.
Debenture holders have a voice in how the company is run. They also have a say on what goes into the company’s budget and how it is spent. In contrast, shareholders only have voting rights on who gets to be on the board of directors and who gets to be appointed as a director.
How You Can Convert Debentures Into Shares
Debentures are a type of security that is offered by companies or governments to investors. These securities have a fixed maturity date, and they offer a higher rate of interest than bonds.
Investors can convert debentures into shares in two ways:
1) They can sell their debenture for cash and buy shares on the open market, or
2) They can hold onto the debenture until it matures and converts it into shares at that time.
Companies use debentures as an alternative to issuing shares in order to raise capital without diluting their shareholding.
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