Company Law and Practice · Debt Instruments - Concepts

Types and Classes of Debentures for CS Executive

Updated 11 October 2026 · Fact-checked

Debentures are classified by security (secured, unsecured), convertibility (convertible, non-convertible), redemption (redeemable, irredeemable), registration (registered, bearer) and priority (first, second). To answer any question, name the basis of classification, define each type, give the key difference, and state the Companies Act position.

Understand Types and Classes of Debentures

A debenture is a debt instrument. A company borrows money and gives the lender a certificate that acknowledges the debt. The holder is a creditor, not a member. He gets interest, not dividend, and has no voting right as a debenture holder.

There is no single list of debenture types. Debentures are grouped by the basis of classification. Each basis asks one question. Is there security? Can it become shares? Will it be repaid? Is the holder's name recorded? Who is paid first?

By security: a secured debenture is backed by a charge on the company's assets. An unsecured (naked) debenture has no charge. The holder ranks as an ordinary creditor.

By convertibility: a convertible debenture can be turned into shares, fully or partly, on terms fixed at issue. A non-convertible debenture stays a debt until repaid. By redemption: a redeemable debenture is repayable on a date or in instalments. An irredeemable (perpetual) debenture has no fixed repayment date. Repayment happens on winding up or on a specified event. Do not state the legal limits on perpetual debentures beyond what your study material gives.

By registration: a registered debenture shows the holder's name in the company's register. It is transferred by a transfer instrument. A bearer debenture is payable to whoever holds it and passes by delivery. By priority: first debentures are paid ahead of second debentures out of the same security. Priority also matters in winding up, where workmen's dues rank first under section 326.

Key rules to remember

Classification by security: Secured = charge on assets; Unsecured = no charge; A secured debenture holder can enforce the charge. An unsecured holder is an ordinary creditor.
Classification by convertibility: Convertible = may become shares; Non-convertible = stays debt; Convertible may be fully or partly convertible. The terms are fixed at issue.
Classification by redemption: Redeemable = repayable on a date; Irredeemable = no fixed date; Irredeemable is also called perpetual.
Classification by registration: Registered = name in register, transfer by instrument; Bearer = payable to holder, transfer by delivery; Say clearly how each is transferred.
Classification by priority: First debentures paid before second debentures from the same security; Priority between classes follows their terms of issue.
Workmen's portion of security (section 326): Workmen's portion = Value of security × Workmen's dues ÷ (Workmen's dues + Secured creditor's debts); Illustration in section 326: ₹1,00,000 × 1,00,000 ÷ 4,00,000 = ₹25,000.
Winding up priority (section 326(1)): Workmen's dues, and the secured creditor's shortfall or workmen's portion (whichever is less) pari passu, rank ahead of other debts; Rule applies where a secured creditor has realised the secured asset.

How to solve Types and Classes of Debentures questions

Use this method for any question that asks you to explain, classify or distinguish debentures.

1Read the question and find the basis: security, convertibility, redemption, registration or priority.
2Define a debenture in one line: a debt instrument, and the holder is a creditor.
3Define each type under that basis in one or two lines.
4Give the key difference in rights: charge, conversion, repayment, transfer method or ranking.
5Add a short example, such as a secured non-convertible debenture issued by an Indian company.
6If the question is about winding up, apply section 326 and show the arithmetic.
7End with a clear conclusion that answers the exact question asked.

Quickest way: Five-basis grid

When to use it: Use this when time is short or the question says 'classify' or 'explain the kinds of debentures'.

Write the five bases as headings: security, convertibility, redemption, registration, priority.
Under each, write the two types in one line each.
Add one distinguishing point per basis.
For a 'difference' question, make two columns in your answer only for the pair asked.
Close with one line: a company can combine bases, for example a secured, redeemable, convertible, registered debenture.

Common mistakes in Types and Classes of Debentures

Treating debenture holders as members with voting rights.
Students mix up debentures with shares.
Fix: Write that the holder is a creditor and gets interest. Conversion into shares makes him a member only after conversion.
Saying a convertible debenture is the same as a share.
The word 'convertible' is read as 'already converted'.
Fix: State that it is debt until conversion on the terms of issue.
Mixing up registered and bearer transfer methods.
Both are described as 'transferable'.
Fix: Registered: transfer by instrument and entry in the register. Bearer: transfer by delivery.
Writing one list of types without naming the basis.
Students memorise names, not the logic.
Fix: Always put the basis as a heading, then the types under it.
Assuming a secured creditor always ranks ahead of workmen in winding up.
Students remember that secured means safe.
Fix: Cite section 326: workmen's dues rank in priority, and the secured creditor's unrealised debt or workmen's portion, whichever is less, ranks pari passu with them.
Calling unsecured debentures worthless.
Students confuse no security with no claim.
Fix: Say the holder has a claim as an ordinary creditor, but no charge on assets.

Worked examples

Example 1

Distinguish between secured and unsecured debentures, and between convertible and non-convertible debentures.

Show the solution

Basis 1 is security. A secured debenture is backed by a charge on the company's assets. If the company defaults, the holder can enforce the charge.
An unsecured debenture has no charge. The holder is an ordinary creditor and shares with other unsecured creditors.
Basis 2 is convertibility. A convertible debenture can be converted into shares, fully or partly, on the terms fixed at issue. Until then the holder is a creditor.
A non-convertible debenture cannot be converted. It is repaid with interest as debt.
The two bases are independent. A company can issue a secured non-convertible debenture or an unsecured convertible one.

Answer: Secured debentures have a charge on assets, unsecured ones do not. Convertible debentures can become shares on the issue terms, non-convertible ones are repaid as debt. The bases are independent and can be combined.

Example 2

In the winding up of a company, the value of a secured creditor's security is ₹1,00,000. Workmen's dues are ₹1,00,000. Debts due to secured creditors are ₹3,00,000. Find the workmen's portion of the security under section 326.

Show the solution

Workmen's portion = Value of security × Workmen's dues ÷ (Workmen's dues + Debts due to secured creditors).
Aggregate = ₹1,00,000 + ₹3,00,000 = ₹4,00,000.
Proportion = ₹1,00,000 ÷ ₹4,00,000 = one-fourth.
Workmen's portion = ₹1,00,000 × 1/4 = ₹25,000.
This matches the illustration in section 326. Where a secured creditor has realised the asset, the shortfall in his debt or this workmen's portion, whichever is less, ranks pari passu with workmen's dues.

Answer: The workmen's portion of the security is ₹25,000.

Exam tips

Answer 'classify' questions with the five bases as headings. This shows structure and earns marks quickly.
For 'distinguish' questions, give points of difference side by side in sentences: meaning, security or transfer, rights, example.
Use the precise words: creditor, charge, conversion, redemption, bearer. Avoid vague terms like 'safe' or 'risky'.
Link to winding up when asked about priority and cite section 326.
End each answer with a one-line conclusion that answers the question asked.

Practice questions from Debt Instruments - Concepts

Types and Classes of Debentures: frequently asked questions

What are the main types of debentures?

They are classified by security (secured, unsecured), convertibility (convertible, non-convertible), redemption (redeemable, irredeemable), registration (registered, bearer) and priority (first, second). Write the basis first, then the types.

What is the difference between convertible and non-convertible debentures?

A convertible debenture can be converted into shares, fully or partly, on terms fixed at issue. A non-convertible debenture cannot be converted and is repaid as a debt with interest.

What is the difference between secured and unsecured debentures?

A secured debenture has a charge on the company's assets, which the holder can enforce on default. An unsecured debenture has no charge, so the holder ranks as an ordinary creditor.

Do debenture holders rank first in winding up?

Not always. Under section 326, workmen's dues are paid in priority to all other debts. A secured creditor who has realised his security ranks pari passu with workmen's dues only for the lesser of his unrealised debt or the workmen's portion.