Debentures under Companies Act, 2013

Last Updated on March 6, 2026

A debenture is a long-term debt instrument that companies or governments use to raise money from the public. This financial instrument acts like a loan agreement where the public borrows an amount while promising to pay interest and repay the principal amount after a period of time. During liquidation, these securities differ from the stocks in that they do not confer ownership in the issuing company, but such owners enjoy preference rights over stockholders.

Section 2(30) of the Companies Act 2013 provides that a 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”.

Typically, debentures would be known as unsecured debts simply because they are secured on any physical assets and thus rely only on the ability of the issuer to pay their commitments. While other debentures may actually be secured on some particular asset as a form of security, debentures can be otherwise classified as convertible debentures, which may be later traded for equity shares, compared to non-convertible debentures, classified solely as debt securities.

The reason is its great flexibility and low level of risks; therefore, it attracts the interest of both issuers and investors. A corporation raises the needed cash without having to sell a portion of its ownership; the investor enjoys regular income and some tax benefits. This is the last one, as debenture financing is corporate finance that taps the most out of equity and secures loans. However, as with any investment, debenture investing involves risks, in particular, the risk of default, which is why, before making an investment, a thorough analysis of the issuer’s financial health is needed.

Some important features of debentures include:

1. Debentures are financial securities that pay interest at regular periods, semi-annually, or annually, whether the company makes any profit or not.
2. Debenture holders are the creditors of the company and do not hold a right to vote, unlike the shareholders of the company.
3. Debentures are usually long-term funding for the corporation that would last from five to twenty years or even more.
4. Debentures can be described as secured, secured against particular company assets or unsecured, depending upon the credibility of the issuer.
5. Returns on debentures issued are also usually lower because the issuer is legally obligated to return the principal amount at maturity. That is, he has to return the money accepted irrespective of profit or loss.
6. Debenture securities are transferable securities and can be sold in the secondary market.
7. At the time of liquidation, the repayment of debentures is given priority before any payment to shareholders from the company’s assets.
8. Convertible debentures can be converted into equity shares, and other remaining debt instruments are termed non-convertible debentures.
9. Debentures are also a cheap mode of capital acquisition because tax deductions are allowed on interest payments by the issuer.
10. Due care toward a comprehensive debenture investment requires considerable study because screening of the issuer’s creditworthiness assumes its prime importance since risks such as the variations in interest and potential default by the issuer might be related to it.

Types of Debentures

The issuers of debentures come into various classifications to facilitate their ability to address the numerous tastes among investors. Therefore, debenture types mainly result from their features and issuance conditions are classified as follows:

1. Secured Debentures – Secured Debentures are provided by the assets of the firm, on account of which the debenture holders make such claims of assets over the defaulters
2. Unsecured Debentures – Debentures have no assets back but rest upon only the creditworthiness of the issuers.
3. Convertible Debentures – Convertible Debentures are those that can be converted into equity shares of the company after a certain period of time.
4. Non-Convertible Debentures or NCDs – These debentures are not issued with the intention of being converted into equity shares but to remain as a debt instrument. In other words, they cannot be converted into equity at any point in time.
5. Partly or Partially Convertible Debentures (PCDs) – The issue of these types of debentures specifies how many debentures to be issued can be converted into equity shares either on a proportional basis or percentage, provided such conditions will have been made at the time of issue.
6. Redeemable debentures – Debentures that the company repays after a specified time period of lock-in are redeemable debentures.
7. Irredeemable (or Perpetual) Debentures – which neither have a maturity date nor can be redeemed except at the discretion of the issuing company.
8. First (senior) debentures – Such debentures have a preference in the case of liquidation repayment over all other debentures.
9. Second (subordinated) debentures – These debentures shall be paid off only after the senior debentures are satisfied.
10.  Registered debentures – These debentures are issued to a certain person and can be transferred only when they are duly registered.
11. Bearer or unregistered debentures – These debentures can be transferred without registration by delivery, as ownership details are not recorded.
12.  Zero-Coupon Debentures – These types of debentures are issued at a discount and do not carry any interest rate throughout the year. Therefore, the investor receives the full face value after maturity.

Issue of Debentures Under the Company Law – Step-by-Step Process

Debentures issued in India by companies are dealt with by the Companies Act, 2013, as well as the Companies (Share Capital and Debentures) Rules, 2014. The Acts and Rules provide an authoritative guide regarding the issue and rights, as well as other obligations involved with debentures. Firms following this law remain within the boundaries of the law and protect the interests of debenture holders, besides other stakeholders.

1. Firstly, there should be an authorisation by the Articles of Association of the company to issue debentures; if there is no AoA authorisation, then the same needs to be amended under Section 14 of the Act.
2. A valuation report needs to be prepared at the price of the debentures to be issued.
3. A separate bank account needs to be opened in a scheduled commercial bank for the monies received on applications for the debenture issue.
4. Call for a board meeting to approve:

• The offer letter for the debenture issue,
• Appointment of debenture trustee and debenture trustee agreement,
• Approval of the debenture subscription agreement,
• Authorisation for the creation of charges on the assets of the company in case of secured debentures,
• Date and time for the extraordinary general meeting,

5. Issue the notice for the general meeting and obtain the approval for the issue of debentures by passing the resolution.
6. File Form MGT-14 for resolutions passed by the shareholders approving the debenture issue.
7. Send the offer letter in Form PAS-4 to the identified group of debenture holders and duly record the same in Form PAS-5.
8. After the allotment money is received in the separate bank account maintained specifically for the said debenture issue, another board meeting needs to be convened for the allotment of debentures, debenture certificates, creation of debenture redemption reserve and debenture deed.
9. Return of allotment is required to be filed with the RoC in Form PAS-3.
10. Issue the debenture certificates to the debenture holders and make their entries in the Register of Debenture Holders.

Redemption of Debentures

Redemption of debentures is the return of the principal amount to the debenture holder at maturity or before the same date, as specified in terms under the issue. It denotes the end of the company’s liability to the debenture holders. Under this procedure, a company must comply with the terms of the issue along with other parts of the Companies Act 2013. The redemption process entails a corporation fulfilling its obligations to its debenture holders and, hence, the integrity and position it has in the financial markets. The redemption process helps the company preserve its reputation and position in the financial markets, and it simultaneously protects the interests and confidence of the debenture holders.

1. Convene a board meeting to approve the process of redemption of debentures by passing a resolution to that effect.
2. Inform the debenture holders about the redemption process along with all the details, forms and timelines.
3. Coordinate and synchronise with the banks to issue monies as refunds to the debenture holders.
4. Changes in the Register of Debenture Holders and Register of Charges, accordingly.

Conclusion

The Companies Act of 2013 provides a holistic module for the issue, management and redemption of debentures with an adequate balance between corporate borrowing and the need for investor protection. It has control over long-term money borrowing by companies without diluting the control over the ownership thereof to realise a major funding source without dilution, thereby making it stand very much in favour of financial structuring. Provisions are made under the Act to ensure transparency, accountability, and protection of the rights of debenture holders through the regulatory and compliance framework.

The setting up of, among other things, Debenture Redemption Reserve, appointment of Debenture Trustees and conditions under which charges can be created on secured debentures aptly reflect the concern of the Act towards creditor protection along with corporate discipline. Timely redemption, along with the reserve fund, forms the pursuit of the financial preparedness of companies to meet obligations.

Debentures do have many positive points, such as fixed interest rates or priority in repayment, but the risks associated must be explored through the financial health of the issuer and the terms prevailing in the debenture itself. With the ability to classify debentures as secured and unsecured, convertible and nonconvertible, redeemable or perpetual, issuers would be able to customise the products according to their goals of financing, while lending creditors a wider horizon of investments to select from.

The Companies Act of 2013 is a strengthened legislation that acts as a comprehensive structure of rules and regulations for debenture financing in India. Once the rules are followed, it will help companies maintain their reputation, attract investors and lead to a sustainable economy. Investors also gain the assurance and security associated with returns. This type of mutual benefit underscores the fact that compliance and financially strong backing for keeping debentures as the cornerstone of corporate lending in India is what is required.

Frequently Asked Questions

1. What are debentures under the Companies Act 2013?

Financial instruments like debentures allow businesses to seek capital from investors. Bonds, debenture stock, and other debt instruments may be among the formal admissions of debt by a corporation under the Companies Act of 2013. Issuing debentures lets businesses collect money for operations with the guarantee of repayment of the principal amount plus interest on a certain date under certain conditions.

2. What are the types of debentures?

Depending on the particular characteristics included, debentures come in a few forms. Registered or bearer debentures, convertible or non-convertible debentures, redeemable or irredeemable debentures, secured or unsecured debentures are some of the several types of debentures that exist.

3. What is meant by redemption of debentures?

The corporation pays the face value to the debenture holders as agreed upon in the terms and conditions or on the maturity date, therefore satisfying its debt obligation by paying the amount that has been contributed plus any interest earned on it. Redemption may happen at par, at a premium, or via regular installments depending on the agreement between the corporation and the debenture holders.

4. How are debentures redeemed under the company law?

Normally redeemable under the conditions stipulated at the time of their issue, debentures under the Companies Act of 2013 are usually. If approved, businesses can opt to redeem them at maturity, in instalments, or by purchasing them on the open market. Moreover, in some situations, corporations have to create a Debenture Redemption Reserve or keep enough money to ensure debt repayment. These measures seek to safeguard the interests of debenture holders as well as to guarantee the prompt fulfilment of the company’s debt responsibilities.

5. What is a secured debenture?

One with specific company assets or properties is known as a secured debenture. Debenture holders have the authority to claim the secured assets to recoup their investments if the corporation defaults on debt or interest repayment. Provided companies meet some requirements, such as creating a charge on the company’s assets and nominating a debenture trustee, the Companies Act of 2013 lets them issue secured debentures.

6. What are convertible debentures?

Financial tools known as convertible debentures can be converted into equity shares of the issuing firm after a specified time frame or upon the fulfilment of certain criteria. This quality lets investors buy the company’s shares later on. Convertible debentures are appealing since they give fixed income at first, then the chance of equity participation down the line. At the time the debentures were issued, the conditions and conversion rate were explicitly stated.

7. What is the role of a debenture trustee?

An individual or organisation appointed to protect the interests of debenture holders is known as a debenture trustee. Companies that issue public debentures are usually required to name a trustee according to the Companies Act of 2013. Acting on behalf of debenture holders in cases of default or disagreement, the trustee guarantees that the company follows the terms of the debenture issuance, protects the collateral given for debenture holders, and oversees repayment obligations.

8. Can a company legally issue debentures to the public?

Companies can actually raise money by issuing debentures to the public if they abide by the Companies Act of 2013 clauses and any pertinent rules. Publicly issued debentures have to meet regulatory requirements, be properly disclosed, and get shareholder permission. Businesses also need to make sure they have the correct documentation, designate debenture trustees when needed, and meet the filing and reporting requirements established by the government.

9. What is a debenture redemption reserve?

Established by some firms, a Debenture Redemption Reserve (DRR) guarantees that enough funds will be on hand to repay debenture holders when the debentures mature. This reserve aims to provide financial security and protect the interests of investors. Under the Companies Act, 2013, the relevant rules and the character of the firm issuing the debentures determine the demands and amount of the DRR.

10. Can debenture holders transfer their debentures?

Yes, usually debenture holders can sell their debentures unless the issuing conditions limit such sales. Registered debentures can be transferred via a formal transfer procedure recorded in the register of debenture holders of the firm. This allows investors to sell or move their debentures to a third party before maturity. As a financial market investment instrument, the versatility of debentures is improved by their transfer capacity.

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