Q.Define a debenture. State its main features.

A debenture's every feature can be traced back to one fact stated in its own legal definition: it is evidence of a debt, never a share of ownership.

Section 2(30) of the Companies Act, 2013 defines a debenture 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 simple terms, a debenture is written proof, issued under the company's authority, that the company has borrowed a stated sum and owes it to the holder, on a promise to pay a fixed rate of interest and to repay the principal by an agreed date or event.

Every feature of a debenture follows directly from this basic character as a debt instrument. It is, first, a written acknowledgment of debt, recording exactly what the company owes and to whom. Second, it carries a fixed rate of interest, which the company must pay at regular intervals whether it has made a profit or a loss in that period — a genuine liability, unlike a dividend, which is only ever paid out of actual profit at the company's own discretion. Third, under Section 71(2) of the Companies Act, 2013, a debenture carries no voting rights whatsoever, because the debenture-holder is a creditor of the company, not a member of it, and therefore has no say in its general meetings or its management. Fourth, a debenture may or may not be secured by a charge over the company's property, this being decided entirely by the terms fixed at the time of issue rather than by the definition of a debenture itself. Fifth, a debenture is generally issued for a stated period, at the end of which the company is bound to repay the principal, on the terms fixed at issue. Finally, on the company's winding up, a debenture-holder is repaid ahead of every class of shareholder, since the debenture-holder's claim is a lia …

A common error is stating that a debenture 'must' be secured; security is optional and depends on the terms of issue, not on the definition of a debenture under Section 2(30). Students also sometimes confuse the fixed interest on a debenture with the fixed dividend on a preference share — the crucial differen …