Debentures are the most popular form of debt capital. A debenture is a written tool accepting a debt under the general authentication of the enterprise. It is an agreement to be agreed between the corporation and the debenture holders that decides the characteristics of a debenture. As in the case of any debt, the debentures have two fundamental features of periodic payment of interest and repayment at a specified point of time. It is essential to prepare an agreement that clearly expresses all the terms and conditions.
Types of Debentures on the Basis of Convertibility
(a) Convertible Debentures
Convertible debenture holders have the option of converting their holdings into equity shares. Debentures that are changeable to equity shares or in any other security either at the choice of the enterprise or the debenture holders are called convertible debentures. These are the debentures that can be converted into shares of the company on the expiry of the pre-decided period. These debentures are either entirely convertible or partly changeable. When the full amount of debentures is convertible into equity shares, such debentures are known as fully convertible Debentures.
If the debenture holders of a company have the option to convert their debentures into equity shares after a fixed period and at a fixed price, such debentures are called convertible debentures. 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. The terms and conditions of conversion are generally announced at the time of issue of debentures.
(b) Non-convertible Debentures
Non-convertible debentures are simple debentures with no such option of getting converted into equity. The debentures which can’t be changed into shares or in other securities are called Non-Convertible Debentures. Their state will always remain in debt and will not become equity at any point in time.
If the debenture holders do not have this option, the debentures will be called non-convertible debentures. The holders of such debentures cannot convert their debentures into the shares of the company. Most debentures circulated by enterprises fall in this class.