Accountancy · Ch 7 — Issue and Redemption of Debentures
Types of Debentures
Types of Debentures
Debentures can be issued in different forms depending on the needs of the company and the preferences of investors. The classification is based on four main criteria: security, tenure, convertibility, and registration. Each type has a distinct meaning and, in some cases, a specific accounting treatment.
Classification by Security
This is the most common basis of classification. Debentures are either secured or unsecured.
Secured Debentures (also called Mortgage Debentures) are backed by a charge on the assets of the company. If the company fails to pay interest or repay the principal, the debenture holders can sell those assets to recover their money. The charge can be a fixed charge (on a specific asset like land) or a floating charge (on the company's general assets like stock-in-trade).
Unsecured Debentures (also called Naked Debentures) carry no charge on any asset. The holders rely solely on the company's general creditworthiness. In practice, most debentures issued in India are secured.
For secured debentures, the company must create a Debenture Trust Deed and appoint a Debenture Trustee to protect the interests of the debenture holders. This is a legal requirement under the Companies Act.
Classification by Tenure
Debentures are classified based on the period for which they are issued.
Redeemable Debentures are issued for a fixed period. The company must repay the principal amount to the holders on a specified date (or in installments). This is the standard type.
Irredeemable Debentures (also called Perpetual Debentures) have no fixed maturity date. The company is not required to repay the principal during its lifetime. The holders receive interest indefinitely. In practice, irredeemable debentures are rarely issued in India because the Companies Act restricts their issue.
Classification by Convertibility
This classification determines whether the debenture can be exchanged for shares.
Convertible Debentures give the holder the right to convert the debentures into equity shares (or sometimes preference shares) at a predetermined time and ratio. They are further divided into:
- Fully Convertible Debentures (FCDs): The entire face value is convertible into shares.
- Partly Convertible Debentures (PCDs): Only a part of the face value is convertible; the remaining part is redeemed as a normal debenture.
Non-Convertible Debentures (NCDs): These cannot be converted into shares under any condition. They are redeemed in cash at maturity.
The accounting treatment for convertible debentures differs at the time of conversion. When debentures are converted into shares, the Debentures Account is debited (to cancel the liability) and the Share Capital Account is credited (to record the new equity). The entry is:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Debentures Account Dr. | xxx | |||
| To Share Capital Account | xxx | |||
| (Being debentures converted into equity shares) |
Classification by Registration
This classification is based on whether the ownership is recorded in the company's books.
Registered Debentures are those for which the company maintains a register of debenture holders. The names, addresses, and holdings of all holders are recorded. Transfer of ownership requires a proper instrument of transfer and is recorded in the register. Interest is paid by cheque or direct credit to the registered holder.
Bearer Debentures (also called Unregistered Debentures) are transferable by mere delivery. The company does not maintain a register of holders. The person who physically holds the debenture certificate is considered the owner. Interest is paid by a coupon attached to the debenture — the holder clips the coupon and presents it to the company's bank for payment. …