Classification

Debentures may be classified on the basis of conversion, security, repayment of capital and transfer, which are briefly explained below.

Conversion. On the basis of debentures are classified into convertible and non-convertible debentures. The convertible debentures give the holder an option to convert them into equity shares during a specified period at a particular rate whereas the non-convertible debentures cannot be converted into equity shares.

Security. On the basis of security, debentures are classified as unsecured or naked and secured. When the debentures are issued without any charge on the assets of the company it is called unsecured or naked debentures. When a charge is made on the assets of the company, it is called secured debentures. The charge may be either floating or fixed. When the charge is floating, a company is free to deal with the assets forming the subject-matter of the charge until the said charge gets fixed. A company can even mortgage such property in priority of the floating charge. Then, the claims of debenture holders come after the preferential creditors but before the unsecured creditors.
Under fixed charge, a specific asset or group of assets or property is pledged as security.

Repayment. On the basis or repayment of capital, debentures many be classified as redeemable and irredeemable. Redeemable debentures provide for the payment of the capital on a specified date or on demand. In the case of irredeemable debentures, the company does not fix any date for the repayment of capital. The holders of such security cannot demand repayment of the capital amount so long as the company is a going concern.

Transfer. Debentures of companies are transferable. On the basis, debentures are classified as bearer debentures and registered debentures. Bearer debentures are transferable by mere delivery whereas a registered debenture can be transferred only by registering the transfer with company.