Introduction

The word ‘Debentures is derived from the Latin term debere which means ‘to borrow’. A company may find it difficult to borrow large sums of money from a single lender, therefore, it may split it into several units and offer the public to purchase ‘debentures’. A debenture is thus a certificate of loan issued by a company to the holder of the debenture. It is undoubtedly a kind of security.

The term debenture has been defined in section 2(30) of the Companies Act as “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.

Palmer defined debenture as an instrument under seal evidencing a debt, the essence of it being the admission of indebtedness.

Debentures normally indicate the security against the loan taken by the company and contain the conditions of repayment, date, rate of interest payable to the holder. In other words, debentures are the acknowledgement of debt, the promise to return.

Characteristics of Debentures

1. Debenture is usually in the form of a certificate issued under the seal of company.

2. Generally issued in series but a single debenture may be issued in case of a sole-lender of the company.

3. Debenture is an acknowledgement of indebtedness.It usually provides for the payment of a specified sum at a specified time.

4. Debentures usually create charge on the undertaking of the company or on some of its assets. This is, however, not an essential characteristicand a debenture creating no charge is also perfectly legal.

5. If it is secured debenture, it creates a charge on the assets or part of assets.

6. The holder of debentures is the creditor of the company and not its member.

7. Adebenture carries no voting right at any meeting of the company.

8. A register of debenture-holders is to be maintained by the company containing all the prescribed particulars of debenture holders.

9. A company must pay interest and redeem the debentures. If it does not, any or all of the debenture holders can approach Tribunal.

Provisions related to the Debentures in the Companies Law

1. Section 2(30) : Definition.

2. Section 44 : Nature of shares or debentures : The shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company.

3. Section 71 : Provisions relating to issue and allotment of debentures

4. Rule 18 of the Companies (Share capital and Debenture) Rule, 2014 : Rules pertaining to issue and allotment of debentures.

Debenture Trust Deed

A debenture trust deed is an instrument that a company executes in favour of a debenture trustee, thereby appointing them and defining their role and duties to protect the interest of debenture holders before debentures are offered for public subscription.

As per Section 71(5) of the Companies Act, 2013 when a company wants to issue debentures to more than 500 members then the company has to execute a debenture trust deed appointing trustees to protect the interests of debenture holders.

As per section 71(6) A debenture trustee shall take steps to protect the interests of the debenture-holders and redress their grievances in accordance with such rules as may be prescribed. 

Kinds of Debentures

Relating to Performance

1. Reedemable Debentures : A redeemable debenture is one which entitles the holder to redeem it. i.e. at the end of specified period, where on such date, the company is legally bound to return the principal amount to the debenture holder.

2. Irredeemable debentures : Irredeemable debentures continue for perpetuity and unlike redeemable debentures, there is no fixed date on which the company needs to pay the debenture holders. It becomes redeemable only when the company goes into liquidation.

Relating to Security

1. Secured Debentures : A secured debenture is one where the company’s assets or a part thereof are charged or mortgaged in favour of the debenture holder. The charge created over the debentures may be fixed or maybe floating. Such charge created has to be registered with the Registrar within 30 days of such creation.

2. Unsecured Debenture : An unsecured debenture is one where no charge or security is created on the assets of the companyin favour of debenture holder.

Relating to Convertibility

1. Fully Convertible Debentures : If the debentures, on the later date, be converted into shares of the company, they are called convertible debentures.

2. Partially Convertible Debentures : Partially convertible debentures can be divided into two parts. The first part being the debentures which are convertible to equity shares of the company and the second part being non-convertible debentures which shall redeem at the expiry of its tenure.

3. Non-Convertible Debentures : Debentures which do not have an option to get converted into equity shares of the company are called non-convertible debentures. These debentures get redeemed at the end of the maturity period. 

Relating to Records

1. Registered Debentures : Registered debentures are payable to registered holder and are transferable in the same manner as shares. In case of registered debenture, the name, address, number of debentures and other details pertaining to holding are entered by the company in the register of debentures.

2. Unregistered (Bearer) Debentures : The bearer debentures are payable to bearer and are transferable like a negotiable instrument by mere delivery. Unlike registered debentures, the company does not maintain the records of such debentures and the principal amount and the interest is paid to the bearer of the instrument as against the name written over such instrument. These debentures are easily transferrable in the market.  

Distinction between Debenture and Share

Features	Shares	Debentures
Definition	These represent equity	These represent debt
Returns from investments	You receive dividends	You receive interest payouts
Access to voting rights	Yes	No
Convertibility features	Cannot be converted into debentures	Convertible debentures can be converted into stocks
Types	Common shareholders and preferred shareholders	Convertible and Non-convertible Debentures
Representatives	Stockholders are part-owners	Debenture holders are creditors
Risk of investment	Have high market risks because of being exposed to market volatility	Have lower risks because of lower exposure to market volatility
Returns	Provide high returns	Provide moderate to low returns