PhD Experts 
In the world of business finance, companies need funds to expand operations, launch new products, or manage working capital. One common way companies raise long-term funds is through debentures. Although the term may sound complex, debentures are a straightforward financial instrument once understood properly.
This article explains what a debenture is, its meaning, features, types, advantages, disadvantages, and how it differs from shares, especially in the Indian corporate and legal context.
What Is a Debenture?
A debenture is a written acknowledgment of debt issued by a company under its seal, promising to repay a specified sum of money after a certain period, along with interest at a fixed rate.
In simple words, when you buy a debenture, you are lending money to a company, and the company becomes your debtor. In return, the company pays you interest regularly and repays the principal amount on maturity.
Debenture holders are creditors of the company, not its owners.
Meaning of Debenture
The word debenture comes from the Latin word “debere”, which means to owe. This clearly indicates the nature of debentures they represent a loan taken by the company.
A debenture includes:
-
Amount borrowed
-
Rate of interest
-
Date of repayment
-
Terms and conditions
-
Security, if any
Legal Definition of Debenture
According to Section 2(30) of the Companies Act, 2013 (India):
“Debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.”
This definition makes it clear that a debenture may or may not be secured by company assets.
Features of Debentures
Debentures have several distinctive features that separate them from other financial instruments:
1. Written Acknowledgment of Debt
A debenture is a formal document that confirms the company’s obligation to repay money.
2. Fixed Rate of Interest
Debentures usually carry a fixed rate of interest, payable quarterly, half-yearly, or annually.
3. Repayment on Maturity
The principal amount is repaid after a specified period, known as the maturity period.
4. No Ownership Rights
Debenture holders do not have voting rights or ownership in the company.
5. Can Be Secured or Unsecured
Debentures may be backed by company assets or issued without any security.
6. Priority Over Shareholders
In case of liquidation, debenture holders are paid before shareholders.
Types of Debentures
Debentures can be classified into different categories based on security, convertibility, repayment, and registration.
1. Secured Debentures
These debentures are secured by a charge on the assets of the company. If the company fails to repay, the assets can be sold to pay debenture holders.
Example: Mortgage debentures
2. Unsecured (Naked) Debentures
These debentures are not backed by any security. Investors rely only on the company’s reputation and creditworthiness.
3. Convertible Debentures
Convertible debentures can be converted into equity shares after a specified period.
Types:
-
Fully Convertible Debentures (FCDs)
-
Partly Convertible Debentures (PCDs)
4. Non-Convertible Debentures (NCDs)
These debentures cannot be converted into shares and remain pure debt instruments until maturity.
5. Redeemable Debentures
Redeemable debentures are repaid by the company after a fixed period or on a specific date.
6. Irredeemable (Perpetual) Debentures
These debentures do not have a fixed maturity date. They are repayable only on liquidation of the company.
7. Registered Debentures
Registered debentures are recorded in the company’s register of debenture holders and can be transferred only by proper transfer deed.
8. Bearer Debentures
Bearer debentures are transferable by delivery and interest is paid to whoever holds the instrument.
Debenture vs Share: Key Differences
| Basis | Debenture | Share |
|---|---|---|
| Nature | Loan to company | Ownership in company |
| Holder | Creditor | Owner |
| Return | Fixed interest | Dividend |
| Voting Rights | No | Yes |
| Risk | Lower risk | Higher risk |
| Priority on liquidation | Paid first | Paid last |
Advantages of Debentures
Debentures offer benefits to both companies and investors.
Advantages to the Company
-
No dilution of ownership
Issuing debentures does not reduce control of existing shareholders. -
Fixed interest cost
Interest is known in advance and helps in financial planning. -
Tax benefit
Interest paid on debentures is treated as a business expense and is tax-deductible. -
Long-term funding
Suitable for financing large projects and expansion.
Advantages to Investors
-
Regular income
Debenture holders receive fixed interest regardless of company profits. -
Lower risk
Compared to shares, debentures carry relatively less risk. -
Priority in repayment
In liquidation, debenture holders are paid before shareholders. -
Suitable for conservative investors
Ideal for investors seeking stable returns.
Disadvantages of Debentures
Despite their benefits, debentures also have limitations.
Disadvantages to the Company
-
Fixed financial burden
Interest must be paid even during losses. -
Risk of insolvency
Excessive debenture issue may increase debt pressure. -
Asset charge
Secured debentures reduce the company’s borrowing capacity.
Disadvantages to Investors
-
Limited returns
Debenture holders do not benefit from high profits. -
No voting rights
Investors have no say in management decisions. -
Interest rate risk
If market interest rates rise, fixed-rate debentures become less attractive.
Role of Debentures in Corporate Finance
Debentures play a crucial role in:
-
Capital structure planning
-
Infrastructure financing
-
Government and PSU fund-raising
-
Corporate expansion projects
In India, companies often issue Non-Convertible Debentures (NCDs) to raise funds from the public and institutional investors.
Debentures in the Indian Context
In India, debenture issuance is regulated by:
-
Companies Act, 2013
-
SEBI (Issue and Listing of Non-Convertible Securities) Regulations
-
RBI guidelines (for NBFCs)
Public companies must follow strict disclosure norms to protect investor interests.
Conclusion
A debenture is an important financial instrument that allows companies to raise long-term funds without giving up ownership. For investors, debentures offer a relatively safe investment option with fixed returns.
Understanding what a debenture is, its types, features, and advantages helps students, investors, and professionals make informed financial and legal decisions. Whether you are studying commerce or planning to invest, debentures remain a fundamental concept in corporate finance.
