Debentures Meaning, Type, And More: A Complete Guide

• Debentures are long-term debt instruments that provide fixed interest income without giving investors ownership rights.

• They come in multiple types: secured/unsecured, convertible/non-convertible, registered/bearer, redeemable/irredeemable, and fixed/floating charge.

• In India, Non-Convertible Debentures (NCDs) are publicly issued and traded on exchanges like the NSE or the BSE. 

• Debentures carry certain risks, such as lack of voting rights or carrying credit, along with interest rate risks. The interest income from debentures is taxable and can affect net returns.

Debentures are widely used financial instruments. They provide you with the benefit of steady interest payments while exposing you to certain risks, such as credit quality and market fluctuations. 

They allow companies and governments to raise capital without giving away ownership. This makes them an attractive tool for long-term funding. 

Over time, debentures have become a popular choice for individuals seeking stable income.  Understanding their types, features, and roles in portfolios is essential for making informed investment decisions. 

Debentures mean a way for companies or the government to borrow money from you while giving you a fixed return. Unlike shares, you do not get ownership or voting rights, but you get steady interest payments. In India, they are popular because businesses often prefer raising money this way instead of going through banks. 

What makes debentures different from normal loans or bonds is that many of them are not backed by collateral. This means you are trusting the company’s creditworthiness and reputation. 

Before investing, it is important to check the issuer’s financial strength, since your returns depend on its ability to pay you back. 

There are different types of debentures, mainly based on security, redemption, tenure, and convertibility. Understanding their differences is important as it can directly affect your potential returns.

Secured debentures are backed by the company’s assets, like property or equipment. In case the issuer defaults, you have a legal claim on those assets, which reduces risk. Since they are safer, secured debentures generally offer lower interest rates.

For instance, many Non-Convertible Debentures (NCDs) fall under secured debentures, giving you a steady income with relatively lower risk. A secured debenture is when a company pledges its factory building as collateral for the loan.

Unsecured debentures mean that there is no backing of assets and rely solely on the issuer’s creditworthiness. Since they carry a higher risk, issuers may offer higher interest rates to attract investors.

In India, unsecured NCDs often promise attractive returns but expose investors to default risk. For retail investors, this means balancing higher income potential with the possibility of delayed or missed payments.

Convertible debentures are hybrid instruments that start as debt but give you the option to convert them into equity shares of the issuing company after a certain period. You earn fixed interest till conversion, and benefit from stock price appreciation if the company performs well. 

On the other hand, non-convertible debentures (NCDs) are pure debt instruments. They remain fixed-income securities for their entire tenure. They remain stable and provide predictable returns without exposure to equity risk. 

The key difference lies in risk and return. Convertible debentures usually carry lower interest rates because of the added equity upside. NCDs may offer higher fixed interest since they lack that conversion feature. 

For example, many Indian companies regularly issue NCDs, which are popular among conservative investors. Alternatively, convertible debentures may appeal to those willing to take on some risk for higher potential gains. 

Registered debentures are tied to your name and details, which the company records officially. This means ownership changes only through a formal transfer, ensuring security and transparency. 

Interest payments are credited directly to your account, making them safe but less liquid. For instance, if you own a registered debenture, only you can receive interest until you transfer it through the company’s process. 

Bearer debentures, in contrast, are not linked to any records maintained by the company. Whoever holds the certificate is considered the owner, and interest is paid to the person presenting the coupon attached. 

This makes them easy to trade and highly liquid, but they come with risks like loss or theft. For example, passing a bearer debenture certificate to someone else instantly gives them the right to future interest payments. 

Redeemable debentures mean debt instruments that come with a fixed maturity date. The issuing company is legally bound to repay the principal on or before the specified redemption date, either at par, premium, or discount. 

They also provide regular interest payments until maturity. This makes them a predictable and relatively secure investment option. For example, an Indian company may issue a 7-year redeemable debenture at a fixed interest rate. This assures investors that their capital will be returned after seven years, along with interest.

Irredeemable debentures, on the other hand, have no fixed maturity period. They are often referred to as perpetual debentures. These continue indefinitely, with investors receiving regular interest. But the principal is repaid only if the company is liquidated. 

While you can generate a steady income, they carry higher uncertainty as you cannot plan for repayment. For instance, although some global markets allow perpetual debentures, in India, the issue of irredeemable debentures is not permitted under current regulations. 

Fixed charge debentures are secured against a specific asset of the company, such as land, buildings, or machinery. This means the asset cannot be sold or transferred until the debt is fully repaid, giving you security. 

The fixed charge remains constant and does not change with business operations. For example, if a company issues fixed charge debentures backed by its factory building, holders have the first right over that property in case of default. 

Floating charge debentures, on the other hand, are secured against general assets. They can include stock-in-trade, receivables, or inventory, which change frequently in value. Unlike a fixed charge, a floating charge allows the company to use and trade these assets in the normal course of business. 

However, if the company defaults or goes into liquidation, the floating charge crystallises and becomes fixed. For instance, a trading firm may issue floating charge debentures secured by its fluctuating inventory, giving it business flexibility. But it may offer investors slightly higher risk compared to fixed charges. 

Debentures work as a way for companies to borrow money from investors without giving ownership. When a company issues a debenture, it promises to pay a fixed interest rate at regular intervals until a maturity date. The interest acts as the company’s borrowing cost but provides a steady income to the investor. 

Credit ratings play an important role. Highly rated companies are considered safer and pay lower interest, while lower-rated companies offer higher interest to attract investors. Some debentures also come with a convertibility option, allowing you to swap them for equity shares in the future, which can provide additional capital gains. 

For example, imagine a company issues a 5-year debenture of ₹10,000 at a fixed 8% interest rate. As an investor, you would earn ₹800 every year as interest, and at the end of 5 years, you would get back your ₹10,000 principal. If the debenture is convertible, you can choose to convert it into company shares instead of taking the repayment. 

This setup benefits both sides. The company gets funds without diluting ownership like issuing shares would. On the other hand, you receive predictable income and, in some cases, the chance for equity growth. 

Debentures provide fixed returns and security while allowing businesses to access funds. Below are the key features:  

• Fixed Interest Rate

Debentures carry a predetermined rate of interest, ensuring you get stable, periodic income. This predictable return makes them attractive to risk-averse investors. 

• Maturity Period

They have a fixed maturity date, at which the company repays the principal to you. The duration can be short-term or long-term, depending on the company’s financing needs. 

• No Voting Rights

Unlike shareholders, debenture holders are creditors, not owners. They do not have voting rights in company decisions and therefore cannot influence management policies. 

• Tradability on Stock Exchanges (NSE/BSE in India)

Many debentures are listed and can be traded on stock exchanges such as the NSE and BSE, providing liquidity. You can sell them in the secondary market before maturity if needed. 

• Credit Rating Impact (CRISIL, ICRA, CARE)

The safety and risk of debentures are assessed by credit rating agencies like CRISIL and ICRA. Highly rated debentures are safer but usually offer lower interest rates, and vice versa. 

• Priority in Liquidation

In case of insolvency, debenture holders are paid before equity shareholders. This priority reduces investment risk and ensures better security compared to stocks. 

In India, companies issue Non-Convertible Debentures (NCDs) through a public issue. These are later listed on stock exchanges like the NSE and BSE, where they can be traded like shares. You can either subscribe at the time of issue or buy them in the secondary market. 

Before investing, check the company’s credibility, coupon rate, and credit rating. Ratings are given by agencies such as CRISIL, ICRA, and CARE. Higher-rated NCDs (AAA, AA+) are safer but offer lower interest. However, lower-rated ones provide higher returns but come with more risk.

Taxation is another factor. Interest income is taxed as per the income tax slabs. If sold before one year, gains are taxed as short-term capital gains as per the applicable income tax slab rates. After one year, the long-term capital gains tax of 20% applies. 

• Consider NCDs with AAA or AA+ ratings, as they are considered the safest options. 

• Review the financial health, profitability, and repayment history of the issuing company before investing. 

• Compare the coupon rate with the rating. A very high rate with a low rating may signal a higher risk. 

• Depend on trusted credit rating agencies such as CRISIL, ICRA, and CARE for reliable assessments. 

• Ensure that the company has a strong track record of timely payment of both interest and principal. 

Debentures provide a fixed-income investment option that is generally safer than equities. However, they also come with certain risks, such as credit default and inflation impact. 

• You receive regular interest payments, ensuring a predictable income. 

• Convertible debentures may allow you to convert into equity shares, offering ownership benefits. 

• Debenture holders have priority in repayment over shareholders if the company goes bankrupt. 

• They generally carry lower risk than stocks, making them attractive to conservative investors. 

• Credit risk exists if the issuing company defaults on repayment. 

• Fixed interest rates may not keep pace with inflation, reducing real returns. 

• In a rising interest rate market, debentures may become less attractive compared to new issues. 

• You have no voting rights and thus limited influence on company decisions. 

• Unlike equities, debentures offer limited capital growth since they do not share directly in company profits. 

In India, the interest earned on debentures is treated as income. It is fully taxable under your applicable income tax slab. If you hold the debenture till maturity, the gains are simply added to your total income and taxed accordingly. 

For capital gains, the taxation depends on the holding period. If a debenture is sold within 1 year, or an unlisted one within 3 years, the profit is treated as Short-Term Capital Gains (STCG) and taxed as per your income slab. 

If held longer, the profit is treated as Long-Term Capital Gains (LTCG) and taxed at 20% with indexation benefits, or 10% without indexation for listed debentures. 

Check how debentures compare with other instruments like shares, loans, and bonds before you invest. 

Loans are borrowed from banks or lenders, usually secured by collateral, and are not tradable in the market. Debentures, on the other hand, are issued to the public, often unsecured, and can be listed for trading. 

Shares represent ownership in a company, while debentures represent borrowed capital. Shareholders enjoy voting rights and dividends, but debenture holders only receive fixed interest and repayment.

Both bonds and debentures are debt instruments, but bonds are usually more secure. They are issued by governments or large PSUs, while debentures are mostly corporate-issued and thus are riskier.

No, debentures are not entirely safe, as their security depends on the issuer’s creditworthiness. While safer than shares, they carry more risk than government bonds. 

Convertible debentures can be converted into equity shares at a set time, offering growth potential with market risk. Non-convertible debentures remain fixed-income instruments, giving higher interest and lower risk but no ownership.  

Secured debentures are backed by company assets as collateral, giving you a claim in case of default. Unsecured debentures have no collateral and rely only on the issuer’s creditworthiness, carrying a higher risk. 

Yes, debentures listed as Non-Convertible Debentures (NCDs) can be traded on Indian stock exchanges like the NSE and the BSE. 

If a company defaults on its debentures, secured debenture holders can claim the company’s assets for repayment. Unsecured holders rely only on general assets and risk losses. 

Interest on debentures is paid at fixed intervals, regardless of the company’s profits. It is taxable under the Income Tax Act, 1961, and tax is deducted at source (TDS) if it exceeds the prescribed limit. 

No, debenture holders do not have voting rights in company decisions. They are creditors and therefore cannot influence management or corporate policies.