Debentures

Owned capital by itself is rarely enough to run a large joint stock company, so a company also borrows — and one of the principal instruments through which it borrows to meet its long- and medium-term needs is the debenture. The Companies Act, 2013 does not attempt to define a debenture by describing exactly what it must contain; instead, Section 2(30) defines it inclusively, providing that "debenture" includes debenture stock, bonds, and any other instrument of a company evidencing a debt, whether or not it constitutes a charge on the company's assets. In plain language, a debenture is simply written proof that the company has borrowed a stated sum of money and owes it to the person named in, or holding, the debenture certificate — an instrument issued under the company's authority, promising a fixed rate of interest and repayment of the principal by an agreed date, whether or not that promise happens to be backed by security over the company's property.

A debenture's defining features all follow from this: it is, at bottom, a debt, never a share of ownership. A debenture carries a fixed rate of interest that the company must pay at agreed intervals, whatever its own profit or loss position happens to be in that period — unlike a dividend, which is paid only when profit exists and the company chooses to declare it, interest on a debenture is a genuine liability the company cannot lawfully skip. A debenture-holder, being a creditor rather than a member of the company, has no right to vote at the company's general meetings and, correspondingly, no say in how the company is actually managed. On the company's winding up, a debenture-holder must be repaid ahead of every class of shareholder, since a debenture-holder's claim is a debt of the company and not a share in its ownership, and if the debenture happens to be secured by a charge over specific assets, the holder can even look to those particular assets for repayment in priority to most other creditors. Debentures are transferable in the manner their terms of issue specify, and, as with shares, only the Board of Directors of the company has the authority to decide to issue them. …