(12.10.9) Kinds of Debentures

Debentures may be of the following kinds:

            (i) Bearer debentures. Bearer debentures are similar to share warrants in that they too are negotiable instruments, transferable by delivery. According to perrins and jeffreys "By making debentures payable to bearer they are invested with the character of a negotiable instrument, so as:

            1.  to make them transferable free from equities;

            2.  to render the delivery of a debenture and any interest coupon a good

              discharge to the company;

            3.  to enable the bearer to sue the company in his own name, if necessary;

            4.  to ensure a good title to any person who acquires the debenture bona fide  for valuable consideration, notwithstanding any defect in the title of the person from whom he acquires it".

The interest on 'bearer debentures' is paid by means of attached coupons. on

maturity, the principal sum is paid to the bearers.

            (i) Registered debentures. These are debentures which are payable to the registered holders, i.e., persons whose names appear in the Register of debenture holders' Such debentures are transferable in the same way as shares or in accordance with the conditions endorsed on their back. The debenture itself consists of two parts: (a) the covenants by the company to pay the principal and interest and (b) the endorsed   conditions, e.g., the term of the loan.

The endorsed conditions vary, but they normally contain a provision that the debenture is one of a series all ranking pari passu. where debentures rank pari passu, they will be discharged in proportion to the amount due in respect both of capital and interest, i.e., in the event of a deficiency of assets, if the interest on some debentures is paid down to a later date than others, the interest due on each is added to the capital thereof and a proportionate distribution of the assets made. If there were no such provision, the debentures would rank in the order of issue regarding the assets charged by the company.

Another usual endorsed condition is that 'no notice of trust' shall be recorded in

the Register of debenture holders (s.153)

(iii) Perpetual or irredeemable debentures. A debenture which contains no clause

as to payment or which contains a clause that it shall not be paid back is called a

perpetual or irredeemable debenture.

However, section 120 expressly states that a condition contained in any debenture is not invalid by reason only that thereby, the debentures are made irredeemable or redeemable only on the happenings of contingency, however remote, or on the expiration of a period, however long. It follows that debentures can be made perpetual, i.e., the loan is repayable only on winding up, or after a long period of time.

            (iv) Redeemable debentures. Redeemable debentures are issued for a specified period of time. On the expiry of that specified time the company has the right to pay back the debenture-holders and have its properties released from the mortgage or charge. Generally, debentures are redeemable.

However, redeemed debentures can be re-issued. Section 121 provides that if there is  no provision to the contrary in the articles, or in the conditions of the issue, or if there is no resolution showing an intention to cancel the redeemed debentures, the company shall have power to keep the debentures alive for the purpose of reissue. The company may reissue either the same debentures or other debentures in their place. Upon such reissue the person entitled to the debentures shall have the same rights and priorities as if the debentures had never been redeemed.

Further, where with the object of keeping debentures alive for the purpose of re- issue, they have been transferred to a nominee of the company, a transfer from that nominee shall be deemed to be a reissue.

            (v) Naked debentures. Normally, debentures are secured by a mortgage or a charge on the company's assets. However, debentures maybe issued without any charge on the assets of the company. Such debentures are called 'Naked or Unsecured debentures'. They are mere acknowledgements of a debt due from the company, creating no rights beyond those of ordinary unsecured creditors.

            (vi) Convertible debentures. A company may also issue convertible debentures, in which case an option is given to the debenture-holders to convert them into equity or preference shares at stated rates of exchange, after a certain period. Such debentures once converted into shares cannot be reconverted into debentures.

According to convertibility, debentures are further classified into three categories:

1. Fully Convertible Debentures (FCDs), 2. Non Convertible Debentures (NCDs),

3. Partly Convertible Debentures (PCDs).

Fully convertible debentures. Fully convertible debentures are those debentures that are converted into equity shares of the company on the expiry of a specified period or periods. Where the conversion is to be made at or after 18 months from the date of allotment but before 36 months, the conversion is optional on the part of  the debenture holders in terms of SEBI guidelines.

Non-convertible debentures. Non convertible debentures are those debentures that do not confer any option on the holder to convert the debentures into equity shares and are redeemed at the expiry of a specified period/(s).

Partly convertible debentures. Partly convertible debenture consists of two parts, viz., convertible and non-convertible. The convertible portion is convertible into equity shares at the expiry of the specified period(s). Non-convertible portion, on the otherhand, is redeemed at the expiry of a certain period/(s). Where the conversion takes place at or after 18 months, as per SEBI guidelines the conversion is optional at the discretion of the debentureholder.