What is a Debenture? Discuss the Different Types of Debentures | 12th HSC Secretarial Practice (S.P.) Chapter 2
The question "What is a Debenture? Discuss the different types of Debentures" is one of the highest-scoring 8-mark long answer questions from Maharashtra State Board (MSBSHSE) 12th Standard HSC Secretarial Practice (S.P.) Chapter 2: Sources of Corporate Finance. In the HSC Board Examination, this question regularly appears in Question 8 (Answer the Following) for 8 Marks. Just like Types of Preference Shares, there are exactly 8 distinct types of Debentures divided into 4 logical pairs, making it effortless to score a full 8 out of 8 Marks! Below is the complete model answer aligned with the latest Balbharati Textbook.
Board Examiner Marking Scheme (8 Marks):
1. Meaning & Legal Definition of Debentures (Section 2(30)): 2 Marks
2. Classification Chart & Explanation of all 8 Types: 6 Marks
Topper's Tip: Always draw the 4-Category Classification Table right after the definition before explaining the 8 points!
1. Meaning and Definition of Debentures
Meaning of Debentures
Debentures are one of the principal sources of raising borrowed capital (debt capital) to meet long-term and medium-term financial requirements of a company. The word "Debenture" is derived from the Latin word "Debere", which means "to owe". A debenture is an instrument of creditorship security (loan certificate) issued by a company under its seal, acknowledging a debt and containing provisions for the repayment of principal and periodic payment of interest at a fixed rate.
Legal Definition (Section 2(30) of the Companies Act, 2013)
According to Section 2(30) of the Companies Act, 2013:
"Debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not."
2. Classification Chart: 8 Types of Debentures
Debentures are classified into 8 distinct types under 4 main bases of classification:
| Sr. No. | Basis of Classification | Types of Debentures (8 Types) |
|---|---|---|
| A. | On the Basis of Security | 1. Secured Debentures 2. Unsecured Debentures |
| B. | On the Basis of Transferability | 3. Registered Debentures 4. Bearer Debentures |
| C. | On the Basis of Repayment (Redemption Condition) | 5. Redeemable Debentures 6. Irredeemable Debentures |
| D. | On the Basis of Convertibility | 7. Convertible Debentures 8. Non-Convertible Debentures |
3. Detailed Explanation: Different Types of Debentures
1. Secured Debentures
The debentures can be secured by creating a charge (mortgage) on the property/assets of the company. Such debentures are called Secured Debentures (or Mortgage Debentures). The security may be for some particular fixed asset (Fixed Charge) or it may be on the assets in general (Floating Charge). The debentures are secured through a legal agreement called a "Trust Deed" executed between the company and the Debenture Trustees. If the company defaults in paying interest or repaying the principal, the trustees can sell the charged property to recover the dues.
2. Unsecured Debentures
These are the debentures that have no security backing them. The company does not offer any fixed or floating charge on its assets to the holders of Unsecured Debentures (also called Simple or Naked Debentures). Holders of such debentures are treated like ordinary unsecured creditors. Important Legal Note: The issue of unsecured debentures is now prohibited by the Companies Act, 2013.
3. Registered Debentures
Registered Debentures are those debentures on which the name of the holder is recorded on the debenture certificate as well as in the company's Register of Debenture Holders. The Register of Debenture Holders contains the name, address, and particulars of holdings of every debenture holder. The payment of interest and repayment of principal are made only to the registered holder. The transfer of registered debentures requires the execution of a regular Transfer Deed.
4. Bearer Debentures
On Bearer Debentures, the name of the holder is not recorded on the debenture certificate, nor are their names entered in the Register of Debenture Holders. Such debentures are transferable by mere delivery (just like a currency note) without executing any transfer deed. The payment of interest is made by means of "Interest Coupons" attached to the debenture certificate, which the holder can encash at the company's bank as and when each coupon falls due.
5. Redeemable Debentures
Redeemable Debentures are mostly issued by companies and are payable at the end of some fixed period, as mentioned on the debenture certificate. Repayment can be made at a fixed maturity date at the end of a specific period (lump sum) or by installments during the lifetime of the company. The provision of repayment is normally made in the "Trust Deed".
6. Irredeemable Debentures
These kind of debentures are not repayable during the lifetime of the company (also called Perpetual Debentures). They are repayable only after the liquidation (winding up) of the company, or when there is a breach of any condition or when some contingency arises (such as failure to pay interest regularly).
7. Convertible Debentures
Convertible Debentures give a right to the holder to convert them into equity shares after a specific period of time at a rate of exchange mentioned in the prospectus/debenture certificate. According to Section 71(1) of the Companies Act, 2013, the issue of convertible debentures must be approved by passing a Special Resolution in a General Meeting before they are issued to the public. These debentures are very advantageous for investors because they gain the right to receive equity shares at a rate that may be lower than the market value of the shares at the time of conversion.
8. Non-Convertible Debentures (NCDs)
Non-Convertible Debentures are not convertible into equity shares on maturity. These debentures are duly redeemed (repaid in cash) on maturity. As a disadvantage, there is no appreciation in value for the investor because they continue solely as debt instruments until redemption.
Quick Memory Trick to Remember All 8 Types in the Exam
Memory Shortcut (4 Basis Words — "S-T-R-C"):
Remember the 4 classification bases using the code "STRC" (Security, Transferability, Repayment, Convertibility):
1. Security: Secured & Unsecured Debentures
2. Transferability: Registered & Bearer Debentures
3. Repayment: Redeemable & Irredeemable Debentures
4. Convertibility: Convertible & Non-Convertible Debentures
Key Concept Summary for Objective Questions (Q.1)
- Interest Coupons: Interest on Bearer Debentures is paid through "Interest Coupons" attached to the debenture certificate, whereas interest on Registered Debentures is paid via Interest Warrants or ECS/NEFT.
- Transfer by Mere Delivery: Bearer Debentures are negotiable instruments and can be transferred by mere delivery without a transfer deed.
- Special Resolution for Convertible Debentures: Under Section 71(1) of the Companies Act, 2013, a company must pass a Special Resolution at a General Meeting to issue Convertible Debentures.
- Prohibition on Unsecured Debentures: Under the Companies Act, 2013, Indian companies are not permitted to issue Unsecured Debentures.