Issue Of Debentures -
A Written Debt Acknowledgement

Issue Of Debentures:

A Debenture is a debt acknowledgement, a written instrument issued by a company under its seal to raise additional funds as loan for long term for a specified period at a fixed rate of interest paid to the debenture holder or investor. The interest rate may be either fixed or floating and is payable even if the company incurs a loss and is reflected in the financial statement. A Debenture is normally issued when the company does not want to dilute its equity capital. It may also be issued for non-cash transaction on purchase of an asset and thereby issuing debenture to its Vendor as consideration for payment. Such issue may be at par, at a discount, or at premium.

On The Basis Of Convertibility:

Convertible Debentures:

Convertible Debentures are those debentures that can be converted into equity shares after the expiry of a specified period.

Convertible debentures particularly attract those investors who believe the company's stock price will rise in the long term and intend to convert to equity. However, the convertible debentures pay a lower interest rate compared to non-convertible debentures.

Nonconvertible Debentures:

Non-convertible Debentures are traditional debentures and cannot be converted into equity shares of the issuing company. It carries a higher interest rate when compared to convertible debentures.

On The Basis Of Redeemability:

Redeemable Debentures:

Redeemable Debentures are those debentures which are repayable at the end of the specified period, either in lump-sum or in instalments during the lifetime of the company. Normally debentures are redeemable in nature and after redemption they can either be cancelled or can be reissued.

Irredeemable Debentures:

Irredeemable Debentures are those debentures which are not repayable during the lifetime of the company and are repaid only on the winding up or liquidation of the company. The debenture holder does not have right to demand for repayment of the principal amount until and unless the issuing company does not default in making payment of the interest regularly.

On the Basis Of Security

Secured Debentures:

Secured Debentures also known as Mortgage Debentures are those debentures which are secured by a charge on the assets or property of the company. It is a debt security backed by a specific asset of the issuer. Its greatest advantage is that if the issuing company fails to pay the principal amount or the interest thereon, then debenture holders have the option to sell the assets of the issuing company to satisfy their claims.

Secured debentures may be issued by a company subject to such terms and conditions as may be prescribed

Unsecured Debentures:

Unsecured Debentures also know as Naked Debentures are those debentures which do not carry any charge or security on the assets of the company.

In case of any default in payment, debenture holders can only file a suit for recovery of money.

Debenture Redemption Reserve Account:

Debenture Redemption Reserve Account (DRR) is compulsorily created by debenture issuing company wherein a portion of the distributable profit of the company is credited for redemption of debentures. Amount equal to 50% of debenture issued shall have to be transferred to DRR Account before starting the process of redemption of debentures.

The amount credited to DRR Account cannot be utilized for any other purpose but redemption of debentures.