Q.Explain the different types of debentures on the basis of security and convertibility.

The same debenture issue is usually described along more than one basis at once, and security and convertibility are two of the most frequently tested.

A convertible debenture combines the safety of fixed interest now with the option to become an equity shareholder later.

Debentures are classified on several independent bases, and security and convertibility are two of the most important.

On the basis of security, a secured (or mortgage) debenture carries a charge over the company's assets, created through a Debenture Trust Deed in favour of the debenture-holders — a fixed charge, tied to one identified asset such as land or a building, or a floating charge, hovering generally over changing assets such as stock-in-trade until it crystallises on default. Where two secured issues carry a charge on the same asset, the earlier-created charge is a first mortgage debenture, repaid ahead of a later, second mortgage debenture on that same asset. An unsecured (or naked/simple) debenture carries no such charge at all; its holder ranks only as an ordinary unsecured creditor if the company defaults, making unsecured debentures inherently riskier and generally less attractive to a cautious investor.

On the basis of convertibility, a convertible debenture gives the holder a contractual right to convert it, wholly (a Fully Convertible Debenture, FCD) or partly (a Partly Convertible Debenture, PCD), into equity shares of the company at a stated ratio, after a fixed period stated in the terms of issue — attractive to an investor who wants fixed-interest safety now with the option of sharing in the company's future growth as a shareholder later. A non-convertible debenture (NCD) carries no such right and remains pure debt throughout its life, redeemed only in cash at maturity; since there is no prospect of future share-price gain, NCDs are the more common choice for a company that wants straightforward borrowed capital without eventually diluting its equity.

A frequent error is treating 'secured' and 'convertible' as alternative names for the same classification rather than two independent bases — a debenture can genuinely be both secured and convertible at once. Students also sometimes assume a floating charge attaches to one specific asset like a fixed charge does; a floating charge instead hovers over a class of changing assets until it crystallises.