Meaning Definition and Types of Debentures

Meaning-Definition-Types-of-Debentures

Meaning Definition and Types of Debentures


A debenture is an instrument of debt executed by the company acknowledging its obligation to repay the sum at a specified rate and also carrying an interest. It is one of the methods of raising the loan capital of the company. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company’s capital structure, it does not become share capital.

As per 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.

The debentures in a company shall be movable property transferable in the manner provided by the articles of the company according to section 44.


1. On the basis of charge: The section 2(30) of the Companies Act 2013 clarifies that the debentures can be secured or unsecured.

Secured debentures: Where debentures are secured by a mortgage or a charge on the property of the company, they are called secured debentures. Debentures that are secured by a mortgage of the whole or part of the assets of the company are called mortgage debentures or secured debentures. The mortgage may be one duly registered in the formal way or one which is secured by the deposit of title deeds in case of urgency. If the issuer defaults in the repayment of principal or payment of interest, his assets can be sold to repay the liability to the investors.

Unsecured debentures: Where they are not secured by any mortgage or charge on any property of the company they are said to be naked or unsecured debentures. These Debentures do not carry any charge on the assets of the company. The holders of such debentures do not therefore have the right to attach particular property by way of security as to repayment of principal or interest. If the issuer defaults in the repayment of principal or payment of interest, the investor has to be along with the unsecured creditors of the company.

2. On the basis of convertibility: the section 71(1) of the Companies Act 2013 a company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption. Thus on the basis of convertibility, debentures can be convertible and non convertible debentures. Convertible debentures can be fully convertible or partly convertible.
Convertible Debentures: Where the debentures are convertible, partly or wholly, into the shares of a company after a specified time, either as a result of exercise of option or in terms of the issue, they are called convertible debentures. Convertible debentures can be of following two types:

(i) Fully Convertible Debentures (FCDs): These are convertible into equity shares of the company with or without premium as per the terms of the issue, on the expiry of specified period or periods. The tenure of the convertible securities of the issuer shall not exceed 18 months from the date of their allotment. Interest will be payable on these debentures upto the date of conversion as per terms of the issue.

(ii) Partly Convertible Debentures (PCDs): These may consist of two kinds namely - convertible and non-convertible. The convertible portion is to be converted into equity shares at the expiry of specified period. However, the non convertible portion is redeemed at the expiry of the stipulated period. If the conversion takes place at or after 18 months, the conversion is optional at the discretion of the debenture holder.
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