The word Debenture is derived from a Latin word
which means to borrow. A debenture is issued in the form of a
certificate under the seal of a company and containing a
contract for the repayment of the principal sum after a fixed
period of time and payment of interest at regular intervals,
generally half yearly. Debentures are issued by a company for
acquiring long-term borrowings.
The debentures can be classified on the following basis.
1. On the basis of Security
a. Secured Debentures- Mortgaged Debentures are
those debentures that are secured against asset/s of a company.
These are also known as secured debentures. In case the company
fails to pay back the principal amount of debenture or fails to
meet its interest obligations on the due date, then the
debenture holders have the right to sell the mortgaged asset in
order to realise their amount due to the company.
b. Unsecured Debentures- These debentures are
treated as unsecured creditors. They do not have any security.
These are uncommon now days.
2. On the basis of Tenure
a. Redeemable Debenture- These debentures are
payable after the expiry of a specific period. These debentures
can be redeemed at par or premium either in lump sum or in
installment. Generally all debentures are redeemable.
Irredeemable Debenture- Irredeemable Debentures
are those debentures that cannot be repayable or redeemable by
a company during its life time. These are repayable only at the
time of winding up of the company. These are also known as
Perpetual Debentures that means debentures having indefinite
life. In India, now days, no company can issue irredeemable
3. On the basis of Mode of Redemption
a. Convertible Debentures- Convertible Debentures
are those debentures that can be converted into equity shares
after a specified period of time. These are of following two
i. Fully Convertible Debentures: When the whole amount
of a debenture is convertible into equity shares of
equivalent amount, then these debentures are called Fully
Convertible Debentures. There is no need to maintain Debenture
Redemption Reserves for such debentures.
ii. Partly Convertible Debentures: When only a part of
the amount of a debenture is convertible into equity
shares, then these debentures are called Partly Convertible
Debentures. In this regards, the Debenture Redemption Reserve
is maintained only for the non-convertible part of the
b. Non-Convertible Debenture- These debentures
cannot be converted into shares. Generally debentures are non
4. On the basis of Coupon Rate
a. Zero Coupon Rate- These debentures do not
contain a specific rate of interest and can be issued at
discount. The excess of the face value of the debenture over
its issue price is considered as interest amount.
b. Specific Rate- These debentures carry a
specific rate of interest which may be fixed or floating.
5. On the basis of Registration
a. Registered Debenture- While issuing such
debentures, the company maintains a record regarding name,
address and number of holding of debentures in the Register of
Debenture Holders of the company.
b. Bearer Debentures- When a company does not
maintain any record of the debenture holders and the debenture
is transferable mere by delivery, then the type of the
debenture held by the holders is termed as Bearer Debenture.
Interests on such debentures are paid to the persons who
produce the interest coupons that are attached with these
debentures in a specified bank.