In any company there may be more than one class of debentures each of which may have different rights as to security, transferability, repayment etc. The main classes are:
(1) Secured debentures :
They are those which are secured by some charge on the property of the company. The charge or mortgage may be ‘fixed’ or ‘floating. Hence there may be ‘fixed mortgage debentures’ or ‘floating mortgage debentures’ depending upon the nature of charge, under the category of secured debentures.
(2) Unsecured or naked debentures :
They are those that are not secured by any charge on the assets of the company. The holders of such debentures are just like ordinary unsecured creditors of the company. Such debentures are not common.
(3) Registered debentures :
The names of such debenture-holders are found in the register of debenture-holders of the company. They are payable to registered holders and their transfer is to be registered with the company in accordance with the conditions of their issue endorsed on their back by means of a regular transfer deed. No restrictions, howsoever reasonable, can be placed on their transferable.
(4) Bearer debentures :
The company keeps no record of the debenture-holders in this case. Such debentures are similar to share warrants in that they too are negotiable instruments, transferable by mere delivery free from equities. The interest on them is paid by means of attached coupons which are cashed by the holder as each falls due. On maturity the principal sum is paid to the bearers.
(5) Redeemable debentures :
They provide for payment of the principal sum on a specified date or on demand or notice.
(6) Irredeemable debentures :
In this case the issuing company does not fix any date by which they should be redeemed and the holders of such debentures cannot demand payment from the company so long as it is a going concern. Such debentures are also called perpetual debentures because usually they are repayable after a long period of time or on winding up.
The terms and conditions on which debentures are issued are endorsed on their back. It may be noted that the two words ‘Bonds’ and ‘Debentures’ are used interchangeably in relation to company finance.