10-04-2017, 07:50 PM
Debentures are classified into various types. These are redeemable, irredeemable, perpetual, convertible, non-convertible, fully, partly, secured, mortgage, unsecured, naked, first mortgaged, second mortgaged, the bearer, fixed, floating rate, coupon rate, zero coupon, secured premium notes, callable, puttable, etc.
The debenture classification is based on their tenure, redemption, mode of redemption, convertibility, security, transferability, type of interest rate, coupon rate, etc. Following are the various types of debentures vis-a-vis their basis of classification.
Redemption / Tenure
Redeemable and Irredeemable (Perpetual) Debentures: Redeemable debentures carry a specific date of redemption on the certificate. The company is legally bound to repay the principal amount to the debenture holders on that date. On the other hand, irredeemable debentures, also known as perpetual debentures, do not carry any date of redemption. This means that there is no specific time of redemption of these debentures. They are redeemed either on the liquidation of the company or when the company chooses to pay them off to reduce their liability by issues a due notice to the debenture holders beforehand.
Convertible and Non-Convertible Debentures: Convertible debenture holders have an option of converting their holdings into equity shares. The rate of conversion and the period after which the conversion will take effect are declared in the terms and conditions of the agreement of debentures at the time of issue. On the contrary, non-convertible debentures are simple debentures with no such option of getting converted into equity. Their state will always remain of a debt and will not become equity at any point of time.
Fully and Partly Convertible Debentures: Convertible Debentures are further classified into two Fully and Partly Convertible. Fully convertible debentures are completely converted into equity whereas the partly convertible debentures have two parts. Convertible part is converted into equity as per agreed rate of exchange based on an agreement. Non-convertible part becomes as good as redeemable debenture which is repaid after the expiry of the agreed period.
Security
Secured (Mortgage) and Unsecured (Naked) Debentures: Debentures are secured in two ways. One when the debenture is secured by the charge on some asset or set of assets which is known as secured or mortgage debenture and another when it is issued solely on the credibility of the issuer is known as the naked or unsecured debenture. A trustee is appointed for holding the secured asset which is quite obvious as the title cannot be assigned to each and every debenture holder.
First Mortgaged and Second Mortgaged Debentures: Secured / Mortgaged debentures are further classified into two types first and second mortgaged debentures. There is no restriction on issuing different types of debentures provided there is clarity on claims of those debenture holders on the profits and assets of the company at the time of liquidation. First mortgaged debentures have the first charge over the assets of the company whereas the second mortgage has the secondary charge which means the realization of the assets will first fulfill the obligation of first mortgage debentures and then will do for second ones.
Transferability / Registration
Registered Unregistered Debentures (Bearer) Debenture: In the case of registered debentures, the name, address, and other holding details are registered with the issuing company and whenever such debenture is transferred by the holder; it has to be informed to the issuing company for updating in its records. Otherwise, the interest and principal will go the previous holder because the company will pay to the one who is registered. Whereas, the unregistered commonly known as bearer debenture. can be transferred by mere delivery to the new holder. They are considered as good as currency notes due to their easy transferability. The interest and principal are paid to the person who produces the coupons, which are attached to the debenture certificate. and the certificate respectively.
Type of Interest Rates
Fixed and Floating Rate Debentures: Fixed rate debentures have fixed interest rate over the life of the debentures. Contrarily, the floating rate debentures have the floating rate of interest which is dependent on some benchmark rate say LIBOR etc.
No Coupon Rate
Zero Coupon and Specific Rate Debentures: Zero coupon debentures do not carry any coupon rate or we can say that there is zero coupon rate. The debenture holder will not get any interest on these types of debentures. Need not get surprised, for compensating against no interest, companies issue them at a discounted price which is very less compared to the face value of it. The implicit interest or benefit is the difference between the issue price and the face value of that debenture. These are also known as Deep Discount Bonds .All other debentures with specified rate of interest are specific rate debentures which are just like a normal debenture.
Secured Premium Notes Debentures: These are secured debentures which are redeemed at a premium over the face value of the debentures. They are similar to zero coupon bonds. The only difference is that the discount and premium. Zero coupon bonds are issued at the discount and redeemed at par whereas the secured premium notes are issued at par and redeemed at the premium.
Mode of Redemption
Callable and Puttable Debentures / Bonds: Callable debentures have an option for the company to buyback and repay to the investors whereas, in the case of puttable debentures, the option lies with the investors. Puttable debenture holders can ask the company to redeem their debenture and ask for principal repayment.
The debenture classification is based on their tenure, redemption, mode of redemption, convertibility, security, transferability, type of interest rate, coupon rate, etc. Following are the various types of debentures vis-a-vis their basis of classification.
Redemption / Tenure
Redeemable and Irredeemable (Perpetual) Debentures: Redeemable debentures carry a specific date of redemption on the certificate. The company is legally bound to repay the principal amount to the debenture holders on that date. On the other hand, irredeemable debentures, also known as perpetual debentures, do not carry any date of redemption. This means that there is no specific time of redemption of these debentures. They are redeemed either on the liquidation of the company or when the company chooses to pay them off to reduce their liability by issues a due notice to the debenture holders beforehand.
Convertible and Non-Convertible Debentures: Convertible debenture holders have an option of converting their holdings into equity shares. The rate of conversion and the period after which the conversion will take effect are declared in the terms and conditions of the agreement of debentures at the time of issue. On the contrary, non-convertible debentures are simple debentures with no such option of getting converted into equity. Their state will always remain of a debt and will not become equity at any point of time.
Fully and Partly Convertible Debentures: Convertible Debentures are further classified into two Fully and Partly Convertible. Fully convertible debentures are completely converted into equity whereas the partly convertible debentures have two parts. Convertible part is converted into equity as per agreed rate of exchange based on an agreement. Non-convertible part becomes as good as redeemable debenture which is repaid after the expiry of the agreed period.
Security
Secured (Mortgage) and Unsecured (Naked) Debentures: Debentures are secured in two ways. One when the debenture is secured by the charge on some asset or set of assets which is known as secured or mortgage debenture and another when it is issued solely on the credibility of the issuer is known as the naked or unsecured debenture. A trustee is appointed for holding the secured asset which is quite obvious as the title cannot be assigned to each and every debenture holder.
First Mortgaged and Second Mortgaged Debentures: Secured / Mortgaged debentures are further classified into two types first and second mortgaged debentures. There is no restriction on issuing different types of debentures provided there is clarity on claims of those debenture holders on the profits and assets of the company at the time of liquidation. First mortgaged debentures have the first charge over the assets of the company whereas the second mortgage has the secondary charge which means the realization of the assets will first fulfill the obligation of first mortgage debentures and then will do for second ones.
Transferability / Registration
Registered Unregistered Debentures (Bearer) Debenture: In the case of registered debentures, the name, address, and other holding details are registered with the issuing company and whenever such debenture is transferred by the holder; it has to be informed to the issuing company for updating in its records. Otherwise, the interest and principal will go the previous holder because the company will pay to the one who is registered. Whereas, the unregistered commonly known as bearer debenture. can be transferred by mere delivery to the new holder. They are considered as good as currency notes due to their easy transferability. The interest and principal are paid to the person who produces the coupons, which are attached to the debenture certificate. and the certificate respectively.
Type of Interest Rates
Fixed and Floating Rate Debentures: Fixed rate debentures have fixed interest rate over the life of the debentures. Contrarily, the floating rate debentures have the floating rate of interest which is dependent on some benchmark rate say LIBOR etc.
No Coupon Rate
Zero Coupon and Specific Rate Debentures: Zero coupon debentures do not carry any coupon rate or we can say that there is zero coupon rate. The debenture holder will not get any interest on these types of debentures. Need not get surprised, for compensating against no interest, companies issue them at a discounted price which is very less compared to the face value of it. The implicit interest or benefit is the difference between the issue price and the face value of that debenture. These are also known as Deep Discount Bonds .All other debentures with specified rate of interest are specific rate debentures which are just like a normal debenture.
Secured Premium Notes Debentures: These are secured debentures which are redeemed at a premium over the face value of the debentures. They are similar to zero coupon bonds. The only difference is that the discount and premium. Zero coupon bonds are issued at the discount and redeemed at par whereas the secured premium notes are issued at par and redeemed at the premium.
Mode of Redemption
Callable and Puttable Debentures / Bonds: Callable debentures have an option for the company to buyback and repay to the investors whereas, in the case of puttable debentures, the option lies with the investors. Puttable debenture holders can ask the company to redeem their debenture and ask for principal repayment.