KINDS OF DEBENTURES CHARACTERISTICS OF DEBENTURES Rules and Guidelines on Debentures A debenture is the most important instrument and method of raising the loan capital by the company. A debenture is like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company’s capital structure, it does not become share capital.

1. By :-
Jayasankar
Jayasoman

2.  As we all know share capital is the main source of finance of a company. Such capital is
raised by issuing shares. Those who hold the shares of the company are called the shareholders
and are owners of the company. The company may need an additional amount of money for a
long period. It cannot issue shares every time. It can raise loans from the public. The amount of
loan can be divided into units of small denominations and the company can sell them to the
public. Each unit is called a ‘debenture’ and the holder of such units is called a Debenture
holder. The amount so raised is a loan for the company.
 A debenture is the most important instrument and method of raising the loan capital by the
company. A debenture is like a certificate of loan or a loan bond evidencing the fact that the
company is liable to pay a specified amount with interest and although the money raised by the
debentures becomes a part of the company’s capital structure, it does not become share capital.

3.  A debenture is an amount of a loan that a company has to raise from the public that’s why a
company issues debenture. A person who purchased and holds a debenture is called a debenture holder
who becomes the creditor/ charge holder of the company a debenture is a document that bears the
company’s seal and is issued by it. A debenture is a document that acknowledges the fact that the
company has earned funds in the sum of the debenture’s nominal value. It entails paying a fixed rate of
interest before the principal is repaid.
 The Companies Act provides an expansive definition of debentures rather than an exhaustive
definition. According to Section 2(30) of the Companies Act 2013, the company has the authority to
issue bonds or debentures, which are debt instruments that can be both secured and unsecured by
establishing a fee on the company’s assets. Debentures are a form of long-term unsecured bond that a
company may issue if it agrees to repay it at a specified future date. The company normally pays interest
to debenture holders at the end of each year before maturity, but if it is unable to pay either the interest or
the principal amount of the loan, the creditors of the company have the right to request the competent
authority that the company be liquidated to recover their money by selling the company’s properties.

4.  The word ‘debenture’ has been derived from the Latin word ‘debere’ which means to borrow. A
debenture is a written instrument acknowledging a debt under the common seal of the company. It
contains a contract for repayment of principal after a specified period or at intervals or the option of the
company and for payment of interest at a fixed rate payable usually either half-yearly or yearly on fixed
dates.
 According to section 2(12) of The Companies Act,1956 ‘Debenture’ includes Debenture Inventory,
Bonds, and any other securities of a company whether constituting a charge on the assets of the company
or not.

5. 1. It is in the form of a certificate of indebtedness of the company and issued by the company itself. It generally creates a charge
on the assets/ undertaking of the company. There is usually a specific date of redemption. The debenture holders are creditors to
the company and they do not have any claim of ownership of the company, unlike shareholders.
2. As the debenture holders are not the owner of the company so they are not entitled to the administration and management of the
company.
3. The debenture holder need not be concerned with the profits or loss of the company, they have a fixed rate of interest on the
principal amount which they get every year irrespective of the financial condition of the company.
4. Debentures usually have a charge on the assets of the company, which means that if the company goes into liquidation and is not
able to repay the amount, the debenture holders can also sell the property of the company through the legal process under the
applicable law to recover the money of the debenture holders.
5. There is an undertaking given by the company to repay debenture holders the principal amount along with the interest at the
stated time.
6. The debenture holders cannot claim the privilege to vote in any meeting of the company.
7. When the company is in winding up, the priority of the company is to repay the debenture holders of the company as per the
applicable law hence, there is no risk involved of loss of money of the debenture holders.

6.  Debentures are generally classified into different categories on the basis of:
 (1) Convertibility of the instrument
 (2) Security of the instrument
 (3) Redemption ability
 (4) Registration of Instrument

7. ON THE BASIS OF CONVERTIBILITY,
On the basis of convertibility, Debentures are classified into the following categories:
 (A) Non-Convertible Debentures- This form of debenture can’t be converted into equity or preference
shares. These debentures are typically repaid only after they reach their maturity date, which is normally 10
or 20 years. These instruments keep their debt status and can’t be converted into stock of the company.
 (B) Partly Convertible Debentures – These partly convertible debentures will be converted into equity
shares at the issuer’s discretion in the future. The conversion ratio is set by the issuer. The ratio is normally
determined when the debentures are subscribed. If a debenture holder converts any of his debentures into
equity, he becomes a shareholder for those converted shares and his rights are amended accordingly. Thus,
convertible debentures are debentures that can be converted by the debenture holder as agreed upon after a
set period of time.

8. ON THE BASIS OF CONVERTIBILITY,
 (C) Fully Convertible Debentures – These are debentures that can be exchanged into equity or
preference shares at a fixed rate of exchange after a set period of time. If a debenture holder converts
his debentures into shares, he ceases to be the company’s creditor and becomes a member as an
additional shareholder. Thus, convertible debentures are debentures that can be converted by the
debenture holder after a set period of time. The rate at which the debenture is exchanged is determined
at the time of issue of such debentures. Only interest is paid to the debenture holder before the
conversion, after which the rights exercised are the same as those of a shareholder. The approval of the
shareholders of the company is required prior to the issuance of convertible debentures.
 (D) Optionally Convertible Debentures- The debenture holder has the option/ability to convert his
or her debentures into stock. The issuer determines the price of conversion, which was agreed upon by
all parties at the time of the issue of such debentures.

9. ON THE BASIS OF SECURITY
 (A) Secured Debentures- The instruments of secured debentures are secured with the charge on the
company’s fixed assets. This is to protect the debenture holder in the event that the issuer company
defaults on either the principal or interest payment, the issuer’s assets can be sold off to satisfy the
debenture holders’ obligation as per the due process of law. Section 71(3) of the Companies Act of 2013
states that a company has the right to issue secured debentures subject to the government of India’s
conditions.
 (B) Unsecured Debentures- These debentures are unsecured in the sense that if the principal or
interest is not paid, the debenture holder will be forced to join other unsecured lenders and will be unable
to sell any property or other assets to repay the debt, thus the name “unsecured debentures.”

10. ON THE BASIS OF REDEEM ABILITY
 (A) Redeemable Debentures – Redeemable debentures are those which are payable on the expiry
of the specific period either in a lump sum or in Instalments during the lifetime of the company.
Debentures can be redeemed either at par or at a premium.
 (B) Perpetual or Irredeemable Debentures “An irredeemable debenture is one in which the
borrower does not have a set period to repay the principal. The debenture holder has no right to claim
payment of the principal unless the company defaults in making regular interest payments. If a
company goes bankrupt, it must pay off all of its debentures, whether redeemable or irredeemable.

11. ON THE BASIS OF REGISTRATION
 (A) Registered Debentures- The debentures issued in the name of a specific person who is listed as
a debenture holder on the company’s register of debenture holders and whose name appears on the
debenture certificate. These debentures may be transferred in the same manner as shares are
transferred, by the use of a proper instrument that is stamped, executed, and meets the demands set
forth in Section 56 of the Companies Act, 2013.
 (B) Bearer Debentures- These debentures, on the other hand, are a negotiable instrument that is
made payable to the bearer and can only be transferred by delivery, similar to share warrants. An
individual who receives a bearer debenture bond becomes a “holder in due course,” with the right to
recover and collect the principal sum as well as interest.

12. BASIS SHARE DEBENTURE
OWNERSHIP A share is a part of the owned capital. So, a
shareholder is an owner of the company
A debenture is a part of the borrowed capital.
So, a debenture holder is only a creditor.
RETURN The return on shares is known as a dividend,
(which is part of the profits of the company)
The return on debentures is known as interest,
which is fixed from the day of the issue of
debentures
CHARGE Vs.
APPROPRIATION
The payment of a dividend is an appropriation
out of profits
The payment of interest is a charge and is to be
paid even if there is no profit
REPAYMENT The amount of share is not returned during the
life of the company although it can be transferred
to another person
Debentures are issued for a fixed period and the
amount is returned after that period
SECURITY Shares are not secured by any charge on the
assets of the company.
Debentures are generally secured and carry a
fixed or floating charge over the assets of the
company
CONVERTIBILITY Shares cannot be converted into debentures Debentures can be converted into shares of the
company
VOTING RIGHTS Voting rights are available to the Shareholders Debenture holders do not normally enjoy any

13. RULES AND GUIDELINES ON DEBENTURES
SEBI issue of capital and disclosure requirement (ICDR) Regulations 2009
“Specified securities” are defined as equity shares and convertible securities under the SEBI Regulation 2009. The
term “convertible securities” refers to a bond that can be exchanged for or converted into equity shares of a
company after its maturity date, with or without the debenture holder’s consent, which also includes convertible
preference shares and convertible debt instruments. As a result, the conditions to be addressed below apply not only
to equity securities but also to public issues of convertible debt instruments. The issuer of such convertible debt
instruments must meet the following requirements:
To get a ranking from one or more credit agencies.
ii. Appointment of one or more trustees in accordance with Section 71(5) of the Companies Act, 2013 and
certain other laws.
iii. Establishment of a Debenture Redemption Reserve in accordance with Section 71(4) of the Companies Act of
2013.

14. RULES AND GUIDELINES ON DEBENTURES
iv. If the company offers to establish a guarantee or fee on its assets in connection with the secured convertible
debt instruments, it must ensure the following:
a) Those assets are sufficient to pay off the entire principal sum at any time.
b) Such properties must be protected from all forms of interruption.
c) If the convertible debt instruments are backed by a second or subsequent payment, the assets or security
should come after the liabilities constituting the prior charge.
d) The issuer is responsible for redeeming the convertible debt securities in accordance with the terms and
conditions of the offer contract. These rules apply to partially convertible debt instruments as well

15. ISSUE OF DEBENTURES
Debentures are normally issued in the same way as they issue shares like, through a prospectus accepting applications for
debentures, with the money to be charged in instalments on application, allotment, and particular dates. There are three ways to
issue a debenture.
At par: It is said to have been issued at par when the sum received for it is equal to the nominal value of the debentures. For
example, the issue of debentures worth Rs. 300/- for Rs. 300/- is said to have been issued at par.
At Discount: A debenture is said to have been given a discount when the amount received is less than the nominal value.
Consider the issue of Rs. 300/- debentures for Rs. 270/-. The difference of Rs. 30/- is the discount, which is referred to as
discount on Debenture.
At Premium: If the price paid for a debenture is higher than the nominal value, it is said to be issued at a premium. For example,
if you issue 300 rupee debentures for 320 rupees, the excess sum over the nominal value, i.e. Rs. 20, is the premium on
debentures. A capital gain is a premium gained on the issuance of debentures. This premium on debenture issuance could not be
used for dividend distribution. Premium on debentures is expressed on the liability side of the Balance Sheet under Surplus and
Reserves.

16. THE TIME LIMIT FOR ISSUE OF
DEBENTURE CERTIFICATE
The allottee is entitled to receive the debenture certificate within six months of the date of allotment. It is provided for in
Section 56(4) of the Companies Act of 2013. According to Section 56(6) of the Companies Act, 2013, if a company fails to
grant the debenture certificate within the time limit, it will be fined a minimum of 25,000 rupees and a maximum of 5,00,000
rupees. A fine of at least 10,000 rupees and up to 10 lakh rupees will be imposed on the officer who is in default. In addition,
Section 71 of the Companies Act, 2013 contains the following provisions about the issuance of debentures:
(a) The company may issue debentures that can be exchanged into shares in part or entirely at the time of redemption with
the approval of a special resolution passed at a general meeting.
(b) Company shall not issue debentures carrying any voting rights.
(c) There will be no voting rights attached to any debenture.
(d) The company is only allowed to issue secured debentures if certain terms and conditions are met. Only secured
debentures of redeemable nature may be given, according to rule 18 of the Companies (Share conditions and Debentures)
Rules [6], 2014

17. RIGHTS/REMEDIES OF DEBENTURE HOLDERS
According to rule 18[11], it is the duty of the debenture trustee to communicate any debenture holder defaults,
if any, with respect to the redemption of debentures or payment of interest, as well as any action was taken by
the trustee himself. Furthermore, if the company fails to pay interest to the debenture holder for two consecutive
years or fails to redeem the debentures, the debenture trustee appoints a nominee director to the board of
directors.
i. A debenture holder is entitled to interest and redemption of debentures in accordance with the terms of
their issue, according to section 71(8) of the Companies Act, 2013.
ii. Section 71(10) of the Companies Act, 2013 provides that if the company fails to pay the interest due or
redeem debentures on their maturity date, the Tribunal may, on the application of the debenture trustee or
any or all of the debentures and after hearing the parties involved, direct the company to redeem the
debentures by an order.

18. RIGHTS/REMEDIES OF DEBENTURE HOLDERS
 Furthermore, if the company fails to comply with the tribunal’s order, section 71(11) of the Companies Act, 2013
provides that the tribunal may punish the officers in default with imprisonment for up to three years or a fine of at least
2,00,000 rupees and up to 5,00,000 rupees, or both. Both secured and unsecured debenture holders are covered by this
provision. The holder of a debenture will ask the Tribunal to issue a payment order for the company that has defaulted.
Before reaching a decision, the Tribunal considers the circumstances surrounding the company’s payment default.
 i. Section 164(2) (b) provides for the disqualification of directors of a company who have failed to redeem
debentures on the maturity date for a period of one year or more. For the next 5 years following the date on which the
company fails to redeem the debentures, that individual will be barred from serving as a director of that company or
any other company.
 ii. Under Section 186(8) of the Companies Act of 2013, any company that has failed to repay any deposits or
make any interest payments is prohibited from making any loan, guaranteeing any acquisition, or providing any
protection until the default has been resolved.

19. REDEMPTION OF
DEBENTURE
The word “redemption of debentures” refers to the company repaying the entire sum of the debentures in
compliance with the terms and conditions of the debentures. The company is not discharged or absolved of its
responsibility on behalf of the debentures until they are repaid. The debentures can be exchanged in four
different forms. There are the following:
1) Payment in a lump sum– At the end of the specified time period, the company redeems the debenture by
making a lump sum payment in accordance with the terms of issue.”
2) Payment in instalments– In this case, the payment for debenture redemption is made in instalments on
particular dates during the debenture’s term. The company’s gross liability is split into the number of years.
3) Purchase on the open market– Redemption of debentures by purchase in the open market occurs when a
company purchases its own debentures for the purpose of cancellation.
4) By conversion into shares or new debentures- In this case, the company redeems its debentures by
converting them into shares or establishing a new debenture class. If the debenture holder believes the offer
is advantageous, he may exercise his right to convert the debentures

20. DEBENTURE REDEMPTION RESERVE ACCOUNT
According to Section 71(4) of the Companies Act, 2013. When a company issues debentures, it is
required to set up a debenture redemption reserve account with income available for dividends, and the
money put into the account can only be used to redeem debentures. Under Rule 18(7) of the Companies
(Share Capital and Debentures) Rules, 2014, such requirements must be met. It is required for the
company to maintain a Debenture Redemption Reserve for the purpose of redeeming debentures, as per
the following conditions:-
(a) The Debenture Redemption Reserve shall be established from the company’s income available for
dividend payment.
(b) Before debenture redemption begins, the company must establish a Debenture Redemption
Reserve equal to at least 50% of the money raised from the debenture issue.

21. DEBENTURE REDEMPTION RESERVE ACCOUNT
(c) Not later than the 30th of April of each year, create a Debenture Redemption Reserve by depositing or investing a sum equal to not
less than 15% of the number of debentures maturing during the year until the 31st of March of the following year, in one or more of the
following ways:
i. In free-of-charge or lien deposits with any scheduled bank.
ii. In unencumbered Central or state government securities
iii. In unencumbered securities
iv. In unencumbered bonds issued by the company.
v. The funds deposited or invested as mentioned above are only to be used for the redemption of debentures maturing during the
year in question, given that the amount remaining invested or deposited, as the case may be, does not fall below 15% of the
number of debentures maturing during the year ending on March 31st of the year in question.
(d) In the case of partially convertible debentures, a Debenture Redemption Reserve shall be established in accordance with this sub-
rule for the non-convertible portion of the debenture matter
(e) The amount added to such an account is only available for redemption of debentures.

22. CONCLUSION
 In business, issuing debentures is one way to raise money for the working of the company. It is very
different from equity shares or other kinds of shares (both preference and equity). The basic distinction
being, when one buys the shares of the company he becomes the part-owner of the company, but when
one buys debentures issued by the company he becomes a creditor to the company. We can conclude that
debenture is a kind of formal loan given to the company by another individual. The company is under
obligation to repay the loan within a specified period of time with interest.