The term ‘debenture’ is derived from the Latin word ‘debere’ which refers to borrow. It represents a superior and refined form of the age-old promissory note. The debenture classification is based on their tenure, redemption, mode of redemption, convertibility, security, transferability, type of interest rate, coupon rate, etc. Debentures are raised for long-term capital needs. It is an agreement to be agreed between the corporation and the debenture holders that decides the characteristics of a debenture.
Types of Debentures on the Basis of Redemption
(a) Redeemable Debentures
Redeemable debentures carry a specific date of redemption on the certificate. These are the debentures that are issued for a fixed period. These debentures are those debentures that are due on the cessation of the time frame either in a lump-sum or in installments during the lifetime of the enterprise. The principal amount of such debentures is paid off to the holders on the expiry of such period. Debentures can be reclaimed either at a premium or at par. These debentures can be redeemed by annual drawings or by purchasing from the open market.
Redeemable Debentures are the debentures that are repaid by the company at the end of a specified period in a lump sum or in installments. These debentures are issued for a specified period of time. The company is legally bound to repay the principal amount to the debenture holders on that date. On the expiry of that specified time, the company has the right to pay back the debenture holders and have its properties released from the mortgage or charge.
(b) Non-redeemable Debentures
These are the debentures that are not redeemed in the lifetime of the company. These debentures are also called Perpetual Debentures as the company doesn’t give any attempt for the repayment of money acquired or borrowed by circulating such debentures. It does not carry any date of redemption. This means that there is no specific time of redemption of these debentures. Such debentures are paid back only when the company goes to liquidation. These debentures are repayable on the closing up of an enterprise or on the expiry (cessation) of a long period.
Irredeemable Debentures are the debentures, which are not repayable during the lifetime of the company and so will be repaid only when the company goes into liquidation. These debentures are redeemable only on the happening of a contingency or on the expiration of a period, however long. They are redeemed either on the liquidation of the company or as per the terms of the issue when the company chooses to pay them off to reduce their liability by issues a due notice to the debenture holders beforehand. It follows that debentures can be made perpetual, i.e., the loan is repayable only on winding up or after a long period of time.