Types of Debentures in Company Law: Classification & Examples

Companies in India often raise funds without giving up ownership by issuing debentures, which are a type of debt instrument. Understanding the types of debentures in company law is important for both businesses and investors, as each type carries different features, risks, and benefits.

As per Section 2(30) of the Companies Act, 2013, a debenture includes any instrument that acknowledges a company’s debt, whether it is secured by assets or not. The issue and regulation of debentures are governed by Section 71 of the Companies Act, 2013 and the Companies (Share Capital and Debentures) Rules, 2014.

Debentures can be classified into different types based on security, convertibility, repayment period, registration, priority, and interest rate. Each type serves a specific purpose and is used depending on the company’s funding needs and investor preferences.

This guide explains the types of debentures in company law, along with their features, examples, and practical use in India.

Key Features of Debentures Under Companies Act 2013

Before understanding the different types of debentures in company law, it is essential to know the core features that apply to all debentures:

• Fixed interest (coupon rate): The company pays interest to debenture holders at a fixed rate, regardless of its profit or loss. The interest obligation exists even in loss-making years.
• No ownership rights: Debenture holders are creditors of the company, not owners. They have no right to vote in the company’s general meetings. However, once convertible debentures are converted into equity shares, the holder gains voting rights.
• Priority in liquidation: During the winding up of a company, secured debenture holders are paid before unsecured creditors and shareholders, subject to insolvency laws. Unsecured debenture holders rank below secured creditors but above shareholders.
• Transferability: Modern Indian debentures usually exist in demat form, allowing seamless trading on BSE/NSE. Companies transfer debentures according to whether they are registered. 
• Trust deed requirement: Under Section 71(5) of the Companies Act, 2013, a company issuing debentures to more than 500 persons must appoint a SEBI-registered Debenture Trustee. The company must also execute a Debenture Trust Deed before issuing the debentures. 
• Debenture Redemption Reserve (DRR): As per Section 71(4) and subsequent MCA amendments, DRR requirements have been relaxed for listed companies, NBFCs, and housing finance companies. Certain unlisted companies may still need to maintain DRR from distributable profits for redemption.

These key features for Debenture in Company Law ensure holders’ rights, repayment security, and regulatory compliance in all company issuances.

Types of Debentures in Company Law: Complete Classification

Debentures in India are classified based on 6 primary criteria to help investors and companies balance risk and capital requirements. These are: 

1. Based on Security

Companies classify debentures by security to show whether they pledge assets as collateral. It can be further bifurcated based on these categories:  

• Secured Debentures: These are backed by a specific asset or group of assets. This means the company provides a charge on its assets as collateral to guarantee the repayment. In case the company defaults, the Debenture Trustee can sell the pledged assets to recover the loan amount. As per applicable rules under the Companies Act, 2013, secured debentures can be issued for a period of up to 10 years (30 years for infrastructure companies).

Example: L&T Finance Ltd frequently issues secured debentures backed by its receivables, immovable properties, and financial assets. If the company faces a crisis, the Debenture Trustee can recover funds from those assets.

• Unsecured Debentures: Companies issue these debentures without backing them with any assets. The company repays holders based entirely on its financial health. During liquidation or default, the company pays unsecured debenture holders only after satisfying secured creditors. Investors consider unsecured debentures riskier than secured ones.

Example: Tata Capital Financial Services issues unsecured debentures that rely entirely on the Tata brand. These debentures depend on the company’s strong credit rating (like CRISIL AAA), as no specific asset backs repayment. 

2. Based on Tenure

Debentures can also be classified based on tenure or the period over which the principal is repaid. There are two main types in this category:

• Redeemable Debentures: These are the most common type of debenture. The company promises to repay the principal at a specified time or in installments over a defined period. Most companies issue redeemable debentures with maturity periods of 1 to 5 years.

Example: Mahindra Finance issues redeemable debentures with 3-year tenures, repaying the principal and interest at maturity.

• Irredeemable Debentures (Perpetual Debentures): These debentures have no fixed maturity date. The company pays interest indefinitely and repays the principal only if it chooses or during liquidation. Regulatory restrictions under Section 71 generally prohibit them in India. Such debentures are generally not permitted in the Indian market under Section 71 of the Companies Act 2013 due to regulatory restrictions. 

Example: IL&FS Financial Services previously issued perpetual debentures that paid interest indefinitely, with principal repayment only at the company’s discretion.

3. Based on Convertibility

Another important classification is whether the debenture can be converted into the company’s equity shares. Based on this, debentures are classified into:

• Convertible Debentures: These allow the holder to convert the debenture into equity shares at a predetermined price, with approval from a special resolution.

There are three main types of convertible debentures:

• Fully Convertible Debentures (FCDs): The company converts the entire principal into equity shares. 

Example: Reliance Industries (RIL) raised capital using FCDs, turning creditors into shareholders who benefited from stock appreciation.

• Partly Convertible Debentures (PCDs): The company converts only a portion of the principal into equity, repaying the remainder in cash. 

Example: Government-backed funds or EDII use PCDs when investing in startups, offering a mix of cash return and ownership.

• Optionally Convertible Debentures (OCDs): The holder or company can choose to convert the debenture into equity, rather than doing so compulsorily. 

Example: A startup may issue OCDs to investors, allowing them to either take back their investment in cash or convert it into equity if the company grows rapidly.  

• Non-Convertible Debentures (NCDs): Companies issue these strictly as debt instruments and do not convert them into equity. They pay investors a fixed interest and return the principal at maturity. Non-Banking Financial Companies (NBFCs) like Bajaj Finance and HDFC Ltd frequently issue NCDs, offering fixed returns to investors.

Example: Bajaj Finance and HDFC Ltd issue NCDs that investors purchase for fixed returns over a specified time period.

4. Based on Registration

Debentures can also be classified based on their registration status. This refers to how the ownership of the debenture is recorded and transferred.

• Registered Debentures: Companies record these in their register of debenture holders and maintain detailed ownership records to ensure transparency and traceability. Investors can transfer registered debentures only through formal processes, usually completing a transfer deed. Most publicly listed debentures today remain registered.

Example: Companies like Edelweiss Financial Services list NCDs on the BSE as registered debentures held in demat form.

• Bearer Debentures: These are transferable by simple physical delivery, like a currency note. The company, hence, does not maintain a register of holders. Bearer debentures are no longer common in India due to SEBI regulations mandating dematerialization and transparency.

Example: Before dematerialization rules, companies like Larsen & Toubro issued bearer debentures in the 1980s, which investors transferred by physical delivery.

5. Based on Priority (or Charge)

When a company issues multiple debentures, it must determine the repayment priority. This classification distinguishes between debentures based on the order of repayment in case of default or liquidation.

• First Charge Debentures: These have the first charge on the company’s assets. In case of default, the first debenture holders are paid before others. This makes first debentures a safer investment, typically offering lower returns due to their lower risk.

Example: Power Finance Corporation issues debentures with a first charge on company assets, ensuring holders receive priority repayment in case of default. 

• Second Charge Debentures: Companies issue debentures with a second charge on assets, repaying these holders only after satisfying first-charge debenture holders. Because of the higher risk, second-charge debentures usually offer higher returns.

Example: Many private sector banks, like HDFC Bank, issue subordinated debt, repaying these holders only after senior depositors and first-charge holders receive their dues.

6. Based on Interest Rate

Debentures are also classified by how the interest rate is structured over time. The two major types are:

• Fixed Rate Debentures: These carry a predetermined interest rate that remains constant for the entire tenure. Investors know exactly how much they will earn as interest.

Example: Bajaj Finance’s NCDs typically offer fixed interest rates, such as 8% annually, depending on the tenure and market conditions.

• Floating Rate Debentures: Companies link the interest rate to an external benchmark like the RBI Repo Rate or MCLR. They adjust the interest when the benchmark changes, making returns less predictable.

Example: IDFC First Bank issues debentures linked to MIBOR. When RBI rates rise, the interest paid to investors also increases.

Additional Types of Debentures in Company Law

Apart from the standard classifications, companies may issue different types of debentures to suit business needs and investor preferences. These include:

• Zero-Coupon Debentures (ZCDs): Companies issue these debentures without periodic interest payments. Investors earn returns at maturity through the difference between the issue price and the redemption value.
• Convertible Preference Debentures (CPDs): These debentures give holders the option to convert their debt into preference shares of the company, combining fixed returns with potential equity benefits.
• Step-Up/Step-Down Debentures: Companies structure interest rates to increase (step-up) or decrease (step-down) over the tenure. This allows flexibility for both the issuer and investor in managing cash flows.
• Deep Discount Debentures (DDDs): Companies issue these debentures at a price significantly below face value. Investors receive the principal plus implied interest at maturity.
• Partly Paid Debentures: Investors pay the debenture price in installments. Companies can mobilize funds gradually, while investors can spread their payment over time.
• Foreign Currency Debentures: Companies issue these in foreign currencies to attract overseas investors and diversify funding sources. Returns are paid in the designated currency. Such instruments are subject to RBI guidelines under the External Commercial Borrowings (ECB) framework.

These types of debentures in company law provide flexibility for capital raising, risk management, and investor attraction under Indian regulations.

How RegisterKaro Helps with Debenture Issuance?

RegisterKaro simplifies the debenture issuance process for companies by managing key compliance tasks. These include:

• Drafting board resolutions and offer letters
• Executing the debenture trust deed
• Registering charges with the ROC
• Filing PAS-4 and PAS-3 returns
• Creating and managing DRR compliance

We file all documents on time and help companies avoid compliance risks such as missed CHG-1 filings or underfunded DRRs. By working with us, companies can raise debt capital smoothly and with confidence. Contact us today!

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