Features of a Debenture

A debenture carries a distinct set of features that separate it sharply from a share, and recognising these features is what allows a student to correctly classify any instrument a company issues. First, a debenture is a written acknowledgment of a debt — it records, in a legally binding document, that the company has borrowed a specific sum and owes it to the holder, exactly as a promissory note or a bond would record a debt owed by an individual. Second, a debenture carries a fixed rate of interest, usually called the coupon rate, which the company is bound to pay at agreed intervals regardless of whether the company has earned a profit in that period. This is a defining contrast with a share: interest on a debenture is a charge against the company's revenue, deductible in computing the company's taxable profit, and must be paid even in a loss-making year, whereas a dividend on a share is only an appropriation of profit, payable solely if profits exist and the Board recommends it.

Third, under Section 71(2) of the Companies Act, 2013, no company can issue debentures carrying any voting rights — a debenture-holder, however large the amount lent, has no voice in the company's general meetings and no say in its management, precisely because a debenture-holder is a lender to the company and not a member of it. Fourth, a debenture may or may not be backed by a charge over the company's assets; whether it is secured or unsecured is a matter of the terms of issue, not a requirement of the definition itself, as already noted in Section 2(30). Fifth, a debenture is generally issued for a specified period after which the company is bound to repay the principal — its terms and conditions of issue, prescribed under Section 71(3) read with the Companies (Share Capital and Debentures) Rules, 2014, fix both the tenure and the manner of redemption at the time of issue, though the exact repayment period allowed by the Rules for secured debentures has itself been amended more than once and should be treated as rule-based rather than fixed permanently. Sixth, debentures are transferable, either by a formal instrument of transfer or, where held in dematerialised form through a depo …