A debenture is a debt instrument which is not backed by any security or collateral. The security of the debenture is the credit of the Company issuing the security. Higher the standing of the Company, lower is the interest rate offered on the debenture. Companies use debentures to raise funds in the medium or long-term.
Types of Debentures
· Unsecured debentures: As per Indian Money reviews, unsecured debentures have no security on assets. They are just like unsecured creditors and enjoy the same rights as unsecured creditors.
· Secured debentures: These debentures enjoy security over the assets of the Company. If the Company defaults on debenture interest, debenture holders sell assets to recover their dues.
· Bearer debentures: You can purchase bearer debentures for a consideration (sum of money). The coupons for interest are attached to the debentures. You/bearer can claim interest from the Company, when it becomes due.
· Registered debentures: According to Indian Money Bangalore, if you purchase a registered debenture, your name is entered in a register. Interest coupons are sent to you/persons whose name is present in the register.
· Redeemable debentures: These debentures are redeemed after a point in time. They are redeemed on expiry of a certain period.
· Irredeemable debentures: As per Indian Money review Bangalore, these debentures are not redeemed within the lifetime of a Company. They are payable only on winding up or on Company default.
· Convertible debentures: Convertible debentures give the holder the right to convert debentures to equity after a certain time.
· Zero interest debentures: You don’t get interest on zero interest debentures. You are compensated by conversion of the debenture to equity shares after a certain time.
· First/Second debentures: Interest payments are paid first to first debenture holders. Then, second debenture holders get interest payments.
· Guaranteed debentures: Banks and Government (third parties) guarantee principal and interest payments.
· Collateral debentures: A Company may issue debentures in favor of a bank or a financial institution as collateral for loans raised.
· Non convertible debenture (NCD): As per IndianMoney.com Review, NCDs cannot be converted to equity. The investor gets principal + accumulated interest at maturity.