As a very important concept of business finance, a debenture is known as debts instrument that both governments and corporations use to issue loans. The loan being issued is based on the corporate reputation at a fixed rate of interest. It is considered to be highly important for raising long- term debt capital. The term debenture is derived from a Latin word called ‘debate’, which means a loan, or to borrow. They are taken to be similar to loan certificates. This kind of certificate is issued under the Debenture Deed. This kind of debt instrument used by the companies is written.
Types of Debentures
There is a list of the type of debentures that exist in the corporate world.
The first and foremost type is Secured Debentures, which means they are secured against an asset of the company. In this case, if the company does not have funds to repay, that particular asset will be sold to pay the loan. This is also known as Mortgage Debenture.
The second type of debenture is Unsecured Debenture in which there is no security by any charge against any asset of the company. Such debentures are also called Naked Debentures and Simple Debentures.
The third type of debenture is Redeemable Debenture, which is repayable only after a stated time period.
The fourth type of debenture is Irredeemable Debenture, which is not repayable during the entire life duration of the company. There is no stated date on which they are payable.
Fully Convertible Debentures
The fifth type of debenture is Fully Convertible Debentures, which means that these can be converted to equity shares at the option of the holder.
Partly Convertible Debenture
The sixth type of debenture is Partly Convertible Debenture in which the holders of debentures are given an option to partially convert their debentures to shares. If this kind of conversion is selected, one can be both the shareholder as well as a creditor of the company.
Non- Convertible Debentures
The seventh type of debenture is Non- Convertible Debentures, which means that, are not convertible into shares.
Coupon Rate Debentures
The eight types of debenture is Coupon Rate in which debentures issued are usually with a particular rate of interest. It is also popularly called as Specific Rate.
The ninth type of debenture is Zero-Coupon DBR in which one does not carry any specified rate of interest.
The tenth type of debenture is Registered Debenture which is payable only to holders who have been registered.
In a nutshell, a debenture is like the creditor of the company which has a return in the form of interest. The debenture holders can have their money back at the time of redemption. The debentures allow charge that is created on the assets of the company. There are certain features of debenture, which includes face value, market value, and redemption value. As debenture holders are not shareholders of the company and only creditors, they do not possess any voting rights in their general meetings. It is to be kept in mind that they are not any kind of instruments of equity.