Debenture is a debt instrument issued by a company acknowledging a debt owed to the holder, which may or may not be secured by a charge on the company's assets. Under Indian law, it is defined in Section 2(30) of the Companies Act, 2013, and the framework for issue and redemption of debentures is governed by Section 71 read with the Companies (Share Capital and Debentures) Rules, 2014.
Legal definition
Section 2(30) of the Companies Act, 2013 provides:
"Debenture" includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not:
Provided that the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934 and such other instrument, as may be prescribed by the Central Government in consultation with the Reserve Bank of India, issued by a company, shall not be treated as debenture.
Section 71 governs the issuance of debentures and provides that a company may issue debentures with an option to convert them into shares, either wholly or partly, at the time of redemption. However, no company shall issue debentures carrying any voting rights.
The SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 further regulate the public issuance and listing of debentures by listed companies and companies seeking to list their debt securities.
How courts have interpreted this term
Sahara India Real Estate Corp. Ltd. v. SEBI (2012) 10 SCC 603
The Supreme Court, in this landmark judgment, held that Optionally Fully Convertible Debentures (OFCDs) issued by the Sahara group companies constituted "securities" within the meaning of the Securities Contracts (Regulation) Act, 1956, the SEBI Act, 1992, and the Companies Act. The Court directed the Sahara group to refund approximately Rs. 17,400 crore to over 30 million investors. This decision clarified that hybrid instruments partaking of the character of debentures fall within SEBI's regulatory jurisdiction, irrespective of how the issuer characterises them.
IFCI Ltd. v. Sutanu Sinha (2011) 4 SCC 150
The Supreme Court examined the nature of compulsorily convertible debentures (CCDs) and observed that such instruments, which mandatorily convert into equity at a future date, partake of the nature of equity rather than debt. The Court held that the economic substance of the instrument, not merely its label, determines its legal character.
Types of debenture
Indian law and practice recognise several categories:
- Secured debentures: Backed by a charge on the company's assets, giving holders priority in repayment. Section 71(3) requires the creation of a debenture redemption reserve.
- Unsecured debentures: Not backed by any charge on assets; holders rank as unsecured creditors on winding up.
- Convertible debentures: May be converted into equity shares after a specified period — fully convertible (FCDs), partly convertible (PCDs), or optionally convertible (OCDs).
- Non-convertible debentures (NCDs): Cannot be converted into shares and must be redeemed at maturity. Regulated by SEBI for listed issuances.
- Perpetual debentures: Have no fixed maturity date; redeemable only on winding up or at the company's option.
Why this matters
Debentures are a primary mechanism through which companies raise debt capital without diluting ownership. Unlike equity shares, debentures do not confer voting rights or ownership interests — they create a creditor-debtor relationship between the holder and the company. The interest paid on debentures is a deductible business expense for the company, making debt financing through debentures potentially more tax-efficient than equity issuance.
For practitioners and investors, the critical distinction lies between secured and unsecured debentures, as this determines the holder's priority in the event of the company's liquidation or insolvency. Under the Insolvency and Bankruptcy Code, 2016, debenture holders qualify as financial creditors under Section 5(8) if the debenture was issued against consideration for the time value of money, giving them a seat on the Committee of Creditors during the Corporate Insolvency Resolution Process.
A common misconception is that all debentures are secured. Section 2(30) explicitly provides that a debenture may or may not constitute a charge on the company's assets. Investors must examine the debenture trust deed and the terms of issue to determine the nature and extent of security, if any.
Related terms
Related instruments:
IBC connections:
Frequently asked questions
Can a company issue debentures with voting rights?
No. Section 71(2) of the Companies Act, 2013 expressly provides that no company shall issue any debentures carrying voting rights. Debentures confer creditor rights, not ownership rights, and voting is the prerogative of shareholders.
Is it mandatory to create a Debenture Redemption Reserve?
Yes, for certain classes of debentures. Section 71(4) requires every company that issues debentures to create a debenture redemption reserve account out of its profits and to deposit or invest a sum not less than 15% of the value of outstanding debentures maturing within the next financial year, as prescribed under Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014. However, certain categories of companies have been exempted by subsequent amendments.
What is a debenture trustee?
Under Section 71(5), when a company issues debentures to the public, it must appoint a debenture trustee. The trustee acts on behalf of debenture holders to protect their interests, ensure compliance with the terms of issue, and take action in the event of default by the company.
Are debenture holders treated as financial creditors under IBC?
Yes. Debenture holders are treated as financial creditors under Section 5(7) read with Section 5(8) of the Insolvency and Bankruptcy Code, 2016, provided the debt was disbursed against consideration for the time value of money. They are entitled to participate in the Committee of Creditors during the CIRP.
This entry is part of the Veritect Indian Legal Glossary, a comprehensive reference of Indian legal terminology grounded in statutory text and judicial interpretation.
Last updated: 2026-03-27. Veritect provides this content for informational purposes and does not constitute legal advice.