Types of Debentures

Debentures are classified on several independent bases at once, and a company's actual debenture issue is usually described by combining a term from each basis — for instance, a "secured, redeemable, non-convertible, registered debenture." Recognising each basis separately, rather than treating the various terms as one long undifferentiated list, is the key to answering classification questions accurately.

On the basis of security, debentures are either secured (mortgage) debentures, backed by a charge — fixed on specific assets, or floating on the company's assets generally — created in favour of a debenture trustee for the benefit of the debenture-holders, or unsecured (naked) debentures, carrying no such charge, so that the holder ranks merely as an ordinary unsecured creditor if the company defaults. On the basis of redemption, debentures are redeemable debentures, repayable by the company either at the end of a fixed period or earlier at the company's option, as stated in the terms of issue, or (far less common in practice today, since the Companies (Share Capital and Debentures) Rules, 2014 fix maximum tenure limits for secured debentures) irredeemable debentures, which carry no fixed date of repayment and are repayable only on the happening of a specified contingency, such as the winding up of the company or a default in payment of interest. On the basis of convertibility, debentures are convertible debentures, which give the holder the option — fully or partly, per Section 71(1) of the Companies Act, 2013 — to convert the debenture into equity shares of the company at the time of redemption, an option that can be attached only where its issue has been approved by a special resolution of the shareholders, or non-convertible debentures (NCDs), which remain a debt instrument throughout their life and are redeemed only in cash, never converted into shares. …