Debentures in Company Law: Concept, Nature, and Importance

Introduction to Debentures under companies act 2013

Debentures is a debt instrument which can be in the form of loan or a bond. According to  section 2(30) of the COMPNAY’S 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”.[1]

The debenture of a company can be movable and transferable accordingly to the manner specified in the articles of associations.

Debentures and its types

The following are the types of Debentures:

Debentures on security

In this the debenture holder has the securities to seal in case of the default of payment by the company. In such cases the risk involved is very less for the debenture holder.

This type of debenture is of two types:

• Secured debentures – These debentures are fixed on charge on company’s assets. In case of default of payment, they can fix the use the company’s assets.

• Unsecured debentures – In this case there is no assets or any properties involved by the company at the time of debt. In this case there is very high risk involved for the debenture holder.

Debenture based on tenure

Upon the maturity date the company when pays for the debentures and made their assets free from the debenture holder is redemption and that is based on the time that has been prescribed.

This type of debentures is also of two types:

• Redeemable debentures: on the date of the expiration the debentures are redeemed by the company.
• Perpetual debentures: If there is no date prescribed for the redeem of the debentures then they will be the perpetual debentures.

Debentures based on conversion

The company can convert the debentures into the equity shares.

They are of two types:

• Convertible debentures – These types of debentures can be converted into equity shares. And the creditor then becomes the shareholder of such shares.

• Non- convertible debentures – These cannot be converted into equity shares and hence the creditor cannot be shareholder.

Debentures based on registration

Types of Debenture based on registration are :

• Registered debentures – The debentures which are registered under the company’s act, 2013 are considered as the registered debentures.

• Unregistered debentures – The debentures which are not registered are unregistered registered.

Advantages of Debenture

Advantages of debenture-to-debenture company:

1. It is the effective way to secure money.
2. It is less authoritative.
3. It gives an option of redemption to the company.

Advantages of debenture to the debenture holder

1. It is a secured way for the debenture holder to invest its money.
2. It has a fixed rate of interest for the debenture holder.
3. The debenture holder can charge the company for the default of payment of debenture.

Disadvantages of debenture

Disadvantages of debentures for the company

1. The debenture can be a little expensive for the company at the time of depression.
2. The company has the burden of paying the interest of the debenture and the charge.

Disadvantages of debentures for the debenture holder

1. The debenture holder does not claim aby ownership on the debenture.
2. The debenture holder cannot charge more then the interest that has been prescribed.

[1] Section 2(30) of the company’s act,2013.