Debentures differ on the basis on terms and conditions on which they are issued.

Security:

Secured/Mortgage Debentures: Debentures secured against assets of the

company .i.e. if the company is winding up, assets will be sold and debenture
holders will be paid back. The charge/mortgage may be fixed or a floating charge.
If it is fixed, charge is on a specific asset say plant, machinery etc. If it is floating
charge, it means it is on general assets of the company.

Which assets are charged: The ones available with the company presently and also
assets in future

Mortgage deed: Includes nature/value of the security, date of interest payment, and
rate of interest, repayment terms, and rights of the debenture holders if the

company defaults. In the event of default of company to pay interest or principal

installment, they can recover their money via the assets mortgaged.

Unsecured/Naked Debentures: Debentures not secured against assets of the

company .i.e. if the company is winding up, assets will be not be sold in order to
pay the debenture holders. In other words, no charge is created on the assets of the
company which means that there is no security of interest and principal payment.
The creditworthiness and soundness of the company serves as a security.

Tenure:

Redeemable Debentures: Debentures which have to be repaid within a certain

specified period. Eg: 5% 2 years Rs. 1000 debenture means redeemable period is 2
years(5%:interest/coupon payment). After redemption, they can be reissued.

Irredeemable/Perpetual Debentures: These can be paid back at any time during

the life of the company .i.e. there is no specified period for redemption. Hence
they are also called Perpetual Debentures. Nonetheless if the company has to wind
up, then they have to repay the debenture holders.

Registration:

Registered Debentures: As the name suggested, these are debentures that are
registered with the company. It records all details of debenture holdings such as
name, address, particulars of holding etc. Interest shall be paid only to the
registered holder (treated as a non-negotiable instrument). They can be transferred
by a transfer deed.

Bearer Debentures: These can be transferred by mere delivery. Company does

not hold records for the debenture holder. Interest will be paid to the one who
displays the interest coupon attached to the debenture.

Coupon:

Zero Coupon Debentures: Does not have a specified interest rate, thereby to
compensate, they are issued at a substantial discount. Interest: Difference in face
value and issue price.

Specific Coupon rate Debentures: Debentures are normally issued with an

interest rate which is nothing but the coupon rate. It can be fixed or floating.
Floating is associated with the bank rates.

Convertibility:

Convertible Debentures (Fully/ Partly convertible): Debentures which can be

converted to either equity shares or preference shares by the company or
debenture holders at a specified rate after a certain period. A company can also
issue Partly Convertible Debentures whereby only a part of the amount can be
converted to equity/preference shares.

Non Convertible Debentures (NCDs): These cant be converted into

equity/preference shares.

Issue relating to Debentures (Unlisted).

Background on Debentures
A debenture is a document that either creates a debt or acknowledges it.
As per section 2(12) of Companies Act 1956/Section 2(30) of the Companies
Act 2013 Debenture includes debenture stock, bond and any other
securities of the company whether constituting a charge on the companys
assets or not.
Simply, it can be stated that issue of debenture means collection of money
from people by the company for the specified purpose. The company issues
a certificate of debenture and receives money against it.
Unlisted debentures are type of interest paying investments . Companies
provide them as a way to raise funds from investors. In returns for your
money, the company promise to make regular payments and return the
money you lent them on a date in the future.
Unlisted debentures usually offer higher interest rate than bank deposits but
also carry higher risks.
TYPES/NATURE OF DEBENTURES
(I)
SecuredorMortgagedebentures:Thesearethedebenturesthat
aresecuredbyachargeontheassetsofthecompany.Theseare alsocalledmortgagedebenture
s.
(II)
Unsecureddebentures:Debentureswhichdonotcarryany
securitywithregardtotheprincipalamountorunpaidinterestare
debentures. These are called simple debentures.

called

unsecured

(III) Redeemabledebentures:Thesearethedebentureswhichare
issuedforafixedperiod.Theprincipalamountofsuchdebentures
ispaidofftothedebentureholdersontheexpiryofsuchperiod.
Thesecanberedeemedbyannualdrawingsorbypurchasingfrom theopenmarket.
(IV) Non-redeemable debentures : These are the debentures which are not
redeemed in the life time of the company. Such debentures are paid back only when
the company goes into liquidation.
(V)
Registered debentures : These are the debentures that are
registeredwiththecompany.Theamountofsuchdebenturesis
payableonlytothosedebentureholderswhosenameappearsin theregisterofthecompany.

(VI) Bearerdebentures:Thesearethedebentureswhicharenot
recorded in a register of the company. Such debentures are
transferrablemerelyby delivery.Holderofthesedebenturesis entitledtogettheinterest.
(VII) Convertibledebentures:Thesearethedebenturesthatcanbe
convertedintosharesofthecompanyontheexpiryofpredecided
period. The term and conditions of conversion are generally
announcedatthetimeofissueofdebentures.
(VIII) Non-convertibledebentures:Thedebentureholdersofsuch
debentures cannotconverttheirdebenturesintosharesofthe company.
(IX)

First debentures : These debentures are redeemed before other debentures.

(X)
Second debentures : These debentures are redeemed after the redemption of
first debentures
It is clear from the existing laws that there is a specified mechanism/Guidelines for issue of
debentures in case of Listed Companies and generally they are govern by listing authoritiesbut as
regards to issue of debentures by unlisted companies there is no mechanism/Specified guidelines
for issue of debentures. In case of unlisted Companies, the risk is more as there is no authority
who controls/examine such cases. As per section 117 of the companies Act, 1956, for issue of
secured debentures, accompany is required to make a debenture trust deed and appoint
adebenture trustee who shall be assigned the duties of debenture trustee. The company has to
create security and debenture redemption reserve account for payment of amount to debenture
holders. As per section 71 of the companies Act, 2013, almost same conditions are given as
prescribed in section 117 of the Companies Act, 1956. Still percentage of security value to be
covered for repayment of debenture amount is not specified in the rules/Act. Duties of debenture
trustee shall also be covered as per Trustee Act for better protection of interest of debenture
holders which is not mentioned in Companies Act, 2013.Even Government authorites do not
have any specific information that in how many cases people lost the money invested in unlisted
companies.
In last many years it was observed that the various companies were registered all over the India
and has issued secured debentures by way of filing Form No 10/Form No. CHG-9 as per
Companies Act, 1956/Companies Act, 2013 respectively but after issuing debentures various
companies has not filed there due Annual Return and Balance Sheet since incorporation. It might
possible that the company were registered only for issuing debentures and to collect money from
General public. A list of 32 companies (in the state of Madhya Pradesh in last two-three years) is
attached herewith which has issued secured debentures but has not filed there overdue Annual
Return and Balance Sheet since incorporation. Prosecution is being filed against these
companies, it is under process.