What Is a Debenture? Meaning, Types and Examples

A debenture is a debt instrument a company issues to borrow money from investors. If you buy one, you lend money to the company under agreed terms. Those terms explain how you will be paid and when the borrowing will be repaid or converted into shares.

You are a lender, rather than a part-owner, while you hold the debenture as debt. In India, debentures can be secured or unsecured, so the name alone does not tell you whether company assets back your investment.

Source: Companies Act, 2013, sections 2(30) and 71, India Code. Act dated 29 August 2013.

How do debentures work?

A company sets out the borrowing terms in its issue documents. Investors who subscribe provide money to the company and receive debentures in return. For an ordinary interest-paying debenture, the company owes the agreed interest and repayment even if its profits fall, although it may fail to meet those obligations.

Companies may use the money to expand their business, fund projects, meet working capital needs or refinance existing debt. Non-convertible debentures let them borrow without issuing ownership shares. Convertible debentures can lead to new shares being issued later.

For you, the practical questions are how much money is due, when it is due and how likely the company is to pay it. The issue document, financial statements and credit-rating rationale help you assess these points.

Example of a debenture

Suppose you buy a debenture at its face value of ₹1,000. It has an 8% annual coupon, pays interest once a year and is repayable at face value after five years.

Annual interest = Face value × Coupon rate = ₹1,000 × 8% = ₹80

The ₹1,000 returned at maturity is your principal, not additional income. The ₹400 interest is spread across five years; it is not a 40% annual return.

The figures shown are for illustrative purpose only

Coupon rate versus investment return

The coupon uses the debenture’s face value. Your purchase price may be different if you buy it in the market. Paying more than ₹1,000 for the same ₹80 annual payment changes what you earn relative to the amount invested.

Yield to maturity considers the purchase price and scheduled payments through maturity. It is a calculation based on assumptions, not an assurance that the issuer will make every payment.

Source: RBI, Government Securities Market in India: A Primer, bond pricing and yield explanations.

Features and structure of debentures

The structure tells you what you are buying. Check these terms together rather than choosing only by the advertised interest rate.

• Face value: The amount used to calculate the coupon, which may differ from the debenture’s market price.
• Coupon and payment frequency: How interest is calculated and when it is payable. Some instruments do not pay periodic coupons.
• Maturity and redemption: When and how repayment is scheduled, including any conditions for early repayment.
• Security and ranking: Whether assets back the debt and where your claim stands relative to other creditors’ claims.
• Conversion terms: Whether the debenture converts into shares and the conditions governing that conversion.
• Listing: Whether the debenture is admitted to trading on a stock exchange. Listing does not guarantee that buyers will be available when you want to sell.
• Credit rating: An assessment of credit risk that can change over time and does not guarantee repayment.

Types of debentures

Debenture types describe different features. A single issue can be secured, non-convertible and redeemable at the same time.

Conversion can be compulsory or optional, so do not assume you can always choose cash repayment instead of shares. With partial conversion, only the specified portion becomes equity.

An NCD is not necessarily secured, and a secured debenture is not necessarily non-convertible. These are separate characteristics.

Payment structures also vary: fixed-rate instruments have a stated coupon, floating-rate instruments reset according to their terms, and zero-coupon instruments do not pay periodic interest. Market-linked debentures have returns tied to specified market measures and need separate assessment.

Sources: Companies Act, 2013, section 71, Act dated 29 August 2013; SEBI, what are corporate bonds? and Income Tax Department, section 76, definition of market-linked debenture, 2026.

How are debentures redeemed?

Redemption means repayment by the issuer under the agreed terms. A redeemable debenture may be repaid in one amount at maturity or through scheduled instalments.

Some issues allow earlier repayment. A call option lets the issuer redeem under specified conditions; a put option lets the investor seek repayment on specified dates and terms. Neither should be assumed unless it appears in the issue documents.

Selling a listed debenture to another investor is different from redemption. A sale gives you the market price, which may be above or below the amount you invested.

Source: SEBI, What are corporate bonds?, redemption and call/put explanations.

Difference between debentures, bonds and loans

In India, bonds and debentures are overlapping terms for debt instruments. The Companies Act’s definition of debenture includes company bonds, whether or not they create a charge over company assets. It is therefore misleading to say that bonds are always secured and debentures are always unsecured.

A conventional loan is usually arranged directly with a bank or another lender. A debenture raises borrowing through an issued security. Listed debentures can be traded, subject to liquidity; a conventional loan is generally not bought and sold by retail investors on an exchange. Both can be secured or unsecured.

Source: Companies Act, 2013, section 2(30). Act dated 29 August 2013.

Difference between debentures and shares

Buying a debenture means lending money to a company, while buying equity shares makes you a part-owner. This difference affects your income, repayment rights and exposure to risk.

After conversion into equity, the converted portion carries the rights and risks of shares.

Advantages of debentures

Debentures help companies raise funds and give investors access to debt investments with defined payment terms. The advantages differ depending on whether you are investing or borrowing.

For investors

Debentures offer features that can help investors plan income and choose terms suited to their needs:

• Income planning: A stated payment schedule helps you plan expected cash receipts, subject to the company meeting its obligations.
• Choice of terms: Different maturities and payout structures let you compare instruments with your investment horizon.
• Contractual rights: The issue terms specify the issuer’s obligations; secured issues also provide rights over collateral, subject to enforcement and recovery.

For companies

Debentures provide a borrowing route alongside bank loans. An issuer can structure repayment around its financing needs, subject to regulations and investor demand. Non-convertible issues also allow it to raise debt without issuing new equity shares.

Borrowing still creates obligations. A payment schedule that suits the company when it raises money can become difficult to service if cash flows weaken.

Disadvantages and risks of debentures

A higher interest rate does not, by itself, make an issue a better investment. Consider what could prevent you from receiving the expected cash flows or exiting when you need the money.

• Credit risk: The issuer may delay or miss payments, and you may lose part or all of your investment.
• Interest rate risk: Rising market rates can lower the resale price of an existing fixed-rate debenture.
• Liquidity risk: You may not find a buyer at a reasonable price when you want to sell.
• Inflation risk: Fixed payments can buy less over time as living costs rise.
• Reinvestment risk: Early redemption or maturing payments may leave you reinvesting at lower rates.

Collateral can support a recovery claim, but its value may be insufficient and enforcement can take time. A high credit rating is also not a promise of repayment. Read the rating rationale, including the risks behind the rating, rather than relying only on its letter grade.

Sources: RBI, Government Securities Market in India: A Primer, pricing and investment-risk concepts. SEBI, Master Circular for Credit Rating Agencies, published 11 July 2025.

How to invest in debentures in India

You can apply to eligible public NCD issues or buy available listed debentures through the secondary market. The process and minimum investment depend on the issue and transaction route.

1. Check the instrument: Read the offer document, issuer financials and latest rating rationale.
2. Match the cash flows to your needs: Review payout frequency, maturity, security, ranking and early-redemption terms.
3. Check the purchase price: Compare yield, accrued interest and charges rather than looking only at the coupon.
4. Use an authorised route: Complete KYC and the demat and account requirements for your chosen route; verify the provider’s registration.
5. Plan your exit: Review trading activity and avoid assuming you can sell immediately at face value.

For an online bond platform, verify its registration status through the regulator or exchange before transacting.

Source: SEBI, Caution to Public regarding unregistered Online Bond Platform Providers, published 19 November 2025.

Some debt mutual funds also invest in corporate debt, according to their mandates. In that case, you own units of a fund, not a particular debenture directly. The fund’s value can fluctuate and its returns are not fixed.

Taxation of debentures in India

For a resident individual holding debentures as investments, interest is generally taxable at applicable slab rates. Capital-gains treatment depends on the instrument and holding period.

Applicable surcharge and cess are additional. These are general rules; exemptions, residency, business holdings and the transaction’s structure can change the result. Check the rules applicable to your transaction with a tax professional.

The tax information in this article is based on prevailing laws at the time of publishing the article and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.

Sources: Income Tax Department, Income-tax Act, 2025, as amended by Finance Act, 2026, including sections 2(101) and 92; section 197; and section 76.

FAQs

Are debentures assets or liabilities?

An ordinary non-convertible debenture is a borrowing liability for the issuing company and a financial asset for the investor. Convertible instruments can require different accounting treatment depending on their contractual terms.

What do 12% debentures mean?

A 12% coupon means annual interest of 12% of face value. On a ₹1,000 face value, that is ₹120 a year, payable according to the terms and subject to the issuer paying. It is not necessarily a 12% return on your purchase price. This example is illustrative and excludes taxes and charges.

The figures shown are for illustrative purpose only

Are debentures safe investments?

Debentures are not risk-free. Their risk depends on the issuer’s ability to pay, collateral, repayment priority, maturity and trading liquidity. Neither a fixed coupon nor a secured label guarantees that you will recover your investment.

What happens if a company defaults on its debentures?

Investors can face payment delays and losses. Recovery depends on the issue terms, available assets, creditor ranking and the applicable legal process. Where a debenture trustee is appointed, check its communications and the issuer’s default disclosures for the next steps.