A debenture is a debt tool used for long-term loans from the public for their capital requirements. Debentures are used either by corporations or even the government. Normally Government raises funds to construct roads or to develop infrastructures whereas corporations use these funds to explore their business. The word debenture is derived from the Latin word “debere” which means borrow, Where funds are borrowed from the public by the Government or corporations. Debentures are issued for the public to get Monthly Income, Quarterly, half-yearly, or Annual Income at a fixed Rate.
Categories of debentures depend upon their Mode of Redemption, Time period of Investment, Convertibility, Security, types of Interest Rate, etc. According to Section 2(30) of the Companies Act, 2013, ‘debenture’ refers to debenture stocks, bonds, or similar instruments issued by a company to the public, representing a debt obligation and examining whether the company’s assets are secured or not.
Check the following Categories of Debentures
As per Security debentures are two types
Secured Debentures: Where a charge is established for the payment. The charge may be floating or fixed.
Unsecured Debenture: There is no charge being established but a floating charge may be established.
Tenure or time
Redeemable Debentures: Some Debentures can be redeemed between of investors or transferred to other Investors.
Irredeemable Debentures: Such debentures are payable for the long term only.
Convertibility of debenture
Convertible Debentures: Debentures that are converted to equity after some time as per enterprises. These debentures either converted partially or even fully get converted.
Non-Convertible Debentures: The debentures that can’t be changed to other forms of securities.
Specific Coupon Rate Debentures: Such Debentures are issued with a fixed rate of Interest.
Zero-Coupon Rate Debentures: This type of debenture does not carry any rate of interest. It provides some discounts to the Investor depending upon the time of Investment.
Registration point of view
Registered Debenture: The details of debenture holders are registered with the enterprises. This type of debenture transfer is by normal transfer deed only.
Bearer Debentures: These debentures are transferred by delivery only and Interest is directly paid to debenture holders.
Credit Rating of Debentures:
The Rate of Interest depends upon the credit ratings of the Company. Higher credit ratings pay less Interest to Investors. Credit Rating measures the creditworthiness of any corporation. Credit Rating provides an overview to an Investor about the company. The Credit Rating Agency provide a rating from AAA to C and D. Here AAA rating is considered most credible and C and D rated company are considered as speculative grade.
Difference between Debenture and Bonds :
Debentures and Bonds both are issued by corporations or the Government. It is also considered less risky than Stocks in Equity Market. But a Demat Account is compulsory for both Debenture and Bonds. Debenture pay regularly to their Investors but there is no collateral are kept against the debentures issued as collateral is kept against the Bonds so Bonds are almost NIL riskier. In case of any default, Debenture holders are paid first then equity holders.