Meaning and Features of a Debenture

A company that has exhausted the goodwill of its own shareholders, or simply wants to raise capital without diluting ownership and control, turns to debt — and the principal instrument through which a joint stock company borrows medium- and long-term money from the investing public is the debenture. Section 2(30) of the Companies Act, 2013 defines the term inclusively rather than exhaustively: "debenture" includes debenture stock, bonds, and any other instrument of a company evidencing a debt, whether or not it constitutes a charge on the assets of the company. Stripped of the statutory language, a debenture is simply a certificate, issued under the company's seal (or an equivalent electronic record where debentures are held in demat form), acknowledging that the company has borrowed a stated sum of money from the person named in it and promising to repay that sum, together with interest at a fixed rate, on terms stated in the debenture itself. For the Maharashtra HSC Secretarial Practice syllabus, the word 'debenture' is used both for the certificate the company issues and, loosely, for the loan itself.

Every debenture, whatever its particular type, shares a common set of features. It is a debt certificate, never a certificate of ownership — a debenture-holder lends money to the company and is therefore a creditor of the company, not a member of it. Interest on a debenture is a fixed contractual charge, payable at the rate and at the intervals stated at the time of issue, and it must be paid whether the company has earned a profit in that year or not — this is the single sharpest difference between a debenture and a share, whose dividend can be paid only out of profit. Because a debenture-holder is a creditor and not a member, Section 71(2) of the Companies Act, 2013 expressly bars a company from issuing any debenture carrying voting rights: a debenture-holder has no right to attend or vote at the company's general meetings and no say in how the company is managed. A debenture normally has a fixed period after which the principal is repaid (its redemption), though the terms of repayment vary by type, as the next section explains. On the company's winding up, debenture-holders rank ahead of every class of shareholder and must be repaid out of the company's assets before shareholders receive anything at all, and where the debenture carries a charge over specific company assets, the holder can look to those very assets for repayment in priority to most of the company's other, unsecured creditors. Finally, debentures are transferable in the manner stated in their own terms of issue, and, exactly as with the issue of shares, the decision to issue debentures is one the Board of Directors alone is authorised to take, subject to the company's Articles of Association and the wider requirements of the Companies Act, 2013.

The Maharashtra HSC Secretarial Practice syllabus builds directly on the previous chapter's introduction to debentures as one source of borrowed capital; this chapter goes further, into the statutory conditions governing their issue, the different types a company may issue, the procedure of issue, and the methods by which debentures are eventually redeemed.