A debenture is an acknowledgement of debts and written promise by the company to repay the loans according to the terms laid down in the document. It is issued to money lenders under the seal of the company. It represents the loan of the company. Even public company can collect money for financing its business by selling debentures in the market.
So it is one of the sources to raise capital or make up the deficiency in the capital account. It may be issued at any time before winding up.
Types of Debentures
The following are the important types of the debentures of the Joint Stock Company.
1. Simple Debentures:-
These are also called Naked Debentures. These kind of debentures are issued without security. The holders of these debentures are considered insecure creditors at the time of winding up of the company. So these are not popular in these days.
2. Mortgage Debentures:-
The debentures which are secured on the permanent asset of the company such as Plant, Machinery, Land and Buildings are known as Mortgage Debentures. These are two kinds of Mortgage Debentures i.e.
( a ) First mortgage debentures.
( b ) Second mortgage debentures.
First Mortgage Debentures holders have first right to claim on the property of the company.
Second Mortgage Debentures holders have second right to claim on the assets of the company.
3. Bearer Debentures:-
There are payable to bearer the documents are negotiable instruments and are transferable by simple delivery. Interest is generally payable against the presentation of coupons attached to the debentures.
4. Registered Debentures:-
The names and addresses of registered debentures holders are recorded in the registered of the company.Transfer and transmission of these must be registered in the books of the company as in the case of shares. Interest is paid to the registered holders in the same manners as distribution of dividend.
5. Redeemable Debenture:-
The amount of these debentures are repayable after a stated period. Tease are issued subject to the condition that the company shall redeem them on specified date. These debentures are very common now a day.
6. Irredeemable Debentures ( Perpetual Debenture ) :-
The amount of such loan repayable on the happening of specified contingencies. Generally no lime is fixes within which the company is bound to redeem them.
7. Floating Debenture:-
Such type of debentures are secured by a floating charges on all the assets of the company. These assets may be bills receivable, stocks and Book Debts. it creates a charge upon them in favor of debentures holder are against other creditors in case of failure on the part of the company.
8. Convertible Debentures:-
These debentures may be converted into preference or ordinary shares of company. This option given to such debenture holder for the period stated in the conditions of the issue . So this provision protects the investors.
9. Equipment Trust Debentures:-
These debentures are issued for specific purposes. Funds are raised by such debentures to purchase certain equipment for the running life of the business.
10. Income Debentures:-
The holders of these types of debentures are entitled to receive interest at fixed rate only out of current year profit. If company gains no profit, no interest ill be payable . So these debentures are not popular now a days.
11. Legal Debentures:-
Where the title of property of the company may be transferred by deed to money lenders are security for the loan, they are known as legal debentures.