Definition of Debenture & Kinds of debentures

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“A debenture is an instrument issued under the seal of the company acknowledging its debt to the holder.A Public company may issue debentures when it wants to borrow money for extending its business without increasing its share capital”

Types of Debentures

Debentures may be different types depending upon the terms and conditions of their issue.

Secures and unsecured debentures

On the basis of security debentures are classified as secured or unsecured .Secured debentures are those which are issued with a specific charge on the property or asset of the company.They may be called mortgage debentures in the sense that the asset of the company remain mortgaged with the debenture-holders.But there is no such security in the case of unsecured or naked debentures.A holder of an unsecured debenture is merely an ordinary creditor.

Redeemable and Irredeemable Debentures

Redeemable debentures are those which are repayable on or after fixed date.The entire issue is either paid off in one installment, or by stages drawing a number of debentures by lot.In the case of irredeemable debentures,however no such provision is made as to their redemption.But the company may redeem them whenever it is a position to do so.Otherwise they are irredeemable except in the event of winding up or some serious default on the part of the company.

Bearer and registered debentures

Debentures fall into two broad categories on the basis of their transferability. The debentures which are transferable by simple delivery are called bearer debentures.These debentures are payable to bearer and are regarded as negotiable instruments. Registered debentures, however,are those which are registered in the books of the company.They cannot be transferred by simple delivery; every transfer must be registered with the company as in the case of shares.These debentures are not negotiable instrument.

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