Debenture

A debenture is a type of loan that isn’t backed by collateral. Its value depends on the issuer’s creditworthiness. Companies and governments use debentures to raise funds.
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What is a Debenture
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3 mins
25-November-2025

Key takeaways

  • A debenture is a type of debt instrument that is not secured by collateral.
  • It typically has a long-term maturity, often exceeding 10 years.
  • The creditworthiness and reputation of the issuer serve as the only security for debenture holders.
  • Both corporations and governments issue debentures to raise funds.
  • Investors receive fixed interest payments over the term of the debenture.

Debenture, meaning refers to a long-term debt instrument issued by companies or governments without any collateral. It represents a loan that investors extend to the issuer based solely on creditworthiness. In return, the issuer commits to repaying the principal along with periodic interest. Debentures are commonly used to raise capital while offering investors fixed returns.

What is a debenture?

A debenture represents an unsecured borrowing method through which organisations or governments obtain funds from the public. Because no specific assets are pledged, investors rely entirely on the issuer’s financial credibility. These instruments typically provide fixed interest payments over a set term, with the principal returned at the end of that period. They are commonly used to support activities such as business growth, infrastructure development, or public initiatives. Still, their lack of collateral means they carry a higher level of credit risk.

Features of debentures

Here are certain features of this type of debt security you should know:

  1. Fixed maturity date: Debentures have a specific maturity date, indicating when the issuer must repay the principal amount to the debenture holders. This date is predetermined and provides clarity on when investors can expect to receive their initial investment back.
  2. Interest payments: Debentures typically pay periodic interest to investors. This interest can be fixed, meaning it remains constant throughout the debenture's life, or it can be variable, in which case it fluctuates based on market conditions or a predefined formula.
  3. No ownership rights: Debenture holders are creditors of the issuer, not owners. They do not have any ownership or voting rights in the issuing company or organisation. Their relationship with the entity is that of a lender.
  4. Secured or unsecured: A debenture can be issued with or without collateral. Secured versions are supported by the issuer’s assets, which offer protection for both the principal and the interest due. Unsecured versions, also known as unsecured issues or debenture stock, do not include any collateral. These are considered riskier, but they usually provide higher interest rates to compensate for the added risk.
  5. Transferability: Debentures are generally transferable, meaning investors can sell, trade, or transfer them to other parties in the secondary market. This feature enhances liquidity and allows investors to exit their investments if needed.
  6. Various types: A debenture can be structured in several ways, each offering distinct features. Common varieties include convertible, non-convertible, redeemable, and irredeemable forms. The selected type influences key elements, including the possibility of conversion, the conditions for redemption, and the applicable interest rate.

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Types of debentures

Let us learn more about the different types of debentures:

1. Convertible debenture

  • A convertible debenture is a type of debt instrument that provides the holder with the option to convert the debenture into equity shares of the issuing company after a specified period.
  • This conversion feature allows investors to benefit from potential capital appreciation if the company's stock price rises, thereby transitioning from being creditors (debt holders) to shareholders.

2. Non-convertible debenture (NCD)

  • Non-convertible debentures are debt instruments that cannot be converted into equity shares. They remain as fixed-income securities throughout their tenure.
  • NCDs offer investors regular interest payments at a predetermined interest rate until the maturity date, providing a predictable income stream.

3. Registered debenture

  • A registered debenture is a debenture for which the issuer maintains a register of debenture holders. These debentures are linked to specific investors, and the issuer has a record of the holders' names and contact information.
  • Registered debentures provide a level of security for investors, as they can be easily traced in case of loss or theft.

4. Unregistered debenture

  • Unregistered debentures, in contrast to registered debentures, do not have a specific record of individual debenture holders. They are considered bearer debentures.
  • Unregistered debentures can be transferred more easily, as they do not require a formal transfer of ownership, making them more convenient for trading in the secondary market.

5. Redeemable debenture

  • Redeemable debentures are debentures that come with a specific maturity date. The issuer is obligated to repurchase them from debenture holders at face value upon maturity.
  • Investors receive both periodic interest payments and the return of the principal amount upon maturity, which provides clarity on when the investment will be repaid.

6. Irredeemable debenture (perpetual debenture)

  • Irredeemable debentures, also known as perpetual debentures, do not have a fixed maturity date. They continue indefinitely, and the issuer has no obligation to repurchase them.
  • Investors receive periodic interest payments, and the principal amount remains invested, with no specified date for redemption. These debentures offer a perpetual income stream.

7. Secured debentures

Secured debentures are backed by the company’s assets, ensuring that in the event of a default, debenture holders can recover their investment through these assets. Holders of secured debentures have a legal claim on the collateral tied to the debenture.

8. Unsecured debentures

Also referred to as naked debentures, these are not backed by any collateral. Their repayment relies solely on the issuing company's financial stability and creditworthiness. While they carry a higher risk than secured debentures, they typically offer greater returns to compensate for the risk.

9. Convertible debentures

Convertible debentures come with the option to be converted into equity shares  of the issuing company after a predetermined period. These debentures appeal to investors seeking long-term growth potential, as they provide an opportunity to gain ownership in the company.

10. First mortgage or preferred debenture

First mortgage or preferred debentures take priority in asset realisation, ensuring that their obligations are settled first in case of liquidation.

11. Second mortgage or ordinary debenture

Second mortgage or ordinary debentures are repaid only after the obligations of first mortgage debentures have been fulfilled during asset realisation.

12. Partially convertible debentures

Partially convertible debentures are debt instruments that can be converted into equity shares, but only up to a specified limit or percentage. As a hybrid security, part of the debenture transitions into company shares, while the remaining portion continues as a fixed-income investment.

Each type of debenture serves different investment and financing purposes, catering to the needs of both issuers and investors with varying financial goals and risk preferences.

Difference between a debenture and a loan

Let’s explore the difference between a debenture and a loan:

1. Debenture

  • A debenture is a type of debt instrument issued by companies to raise capital.
  • It is not secured by physical assets or collateral.
  • Debentures promise to pay interest and principal to the debenture holders.
  • Companies issue debentures to investors, and these investors become creditors of the company.
  • Debentures are typically used for long-term financing.

2. Loan

  • A loan is a sum of money borrowed from a lender.
  • It requires repayment with interest over a specified period.
  • Loans can be secured or unsecured:
    • Secured loan: Backed by collateral (such as property or assets). If the borrower defaults, the lender can seize the collateral.
    • Unsecured loan: No collateral is required, but interest rates may be higher.
  • Banks and financial institutions typically issue loans to individuals and businesses.

While both loans and debentures involve borrowing money, the primary difference lies in security. Debentures are generally unsecured, relying on the issuer’s creditworthiness, whereas loans may be either secured with collateral or unsecured, depending on the agreement with the lender.

Advantages of debentures

Advantages

Disadvantages

Fixed and predictable returns that provide investors with a reliable income stream

Credit risk because unsecured issues depend entirely on the issuer’s financial strength

Secured options offer the safety of principal since they are backed by the issuer’s assets

Inflation risk since fixed interest payments may lose purchasing power over time

Diversification benefits, allowing investors to expand their portfolios beyond equities

Limited capital growth because these instruments do not benefit from increases in company value

High liquidity because many issues can be traded in secondary markets

Interest rate risk because rising market rates reduce the attractiveness of fixed returns

Stable fixed returns that provide consistency even in volatile markets

Potential loss of principal if the issuer defaults, especially in unsecured forms

What are the risk factors while investing in debentures?

Investors should be aware of potential risk factors when considering debenture investments:

  1. Credit risk: Assess the issuer's creditworthiness, as default can lead to losses.
  2. Interest rate risk: Understand the sensitivity of debenture prices to changes in interest rates.
  3. Liquidity risk: Some debentures may have limited liquidity in secondary markets.
  4. Market risk: Be prepared for price fluctuations in response to market conditions.

Debenture Stock

Although a debenture and debenture stock are often mistaken for one another, they serve different purposes. Organisations issue the former as debt securities to raise funds, while the latter resembles preferred stock. Investors who hold debenture stock receive dividend payments at fixed intervals, paid from the issuer’s profits.

Debenture stocks carry a similar risk level to other equity investments, but they are secured by a trust deed. This trust offers a degree of protection, allowing stockholders to appoint receivers to liquidate assets if necessary to recover their investment.

In summary, debentures are considered a safer investment. They offer a fixed interest rate regardless of the issuer's profitability, and debenture holders have priority in asset liquidation. However, frequent issuance of debentures can negatively impact a company's balance sheet and creditworthiness.

Conclusion

A debenture offers a versatile means for companies to raise capital and for investors to earn returns. Some debentures may convert into equity shares, while others provide regular fixed income, catering to different investor needs. They are useful for businesses seeking growth capital without pledging assets. For investors, debentures offer relatively stable income, though they do carry risk due to the lack of collateral. Understanding the types, terms, and associated risks is crucial before investing. Overall, debentures present a valuable financial tool, provided both issuers and investors assess their options with clarity and caution.

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Frequently asked questions

What is a debenture with an example?

A debenture is a long-term borrowing tool that allows a company to raise capital without pledging any specific asset as security. It represents a formal promise to repay the amount borrowed along with interest. For instance, if a business issues a certificate to investors stating the amount borrowed and repayment terms, but does not tie the loan to property or equipment, that certificate is considered a debenture. This differs from secured loans, which are backed by collateral.

What are debentures used for?

Debentures are tools used by lenders, like banks, to provide financing to companies and individuals. They allow lenders to secure repayment of a loan by creating a claim against the borrower's assets, even in the event of default. This claim can be either a fixed charge (on specific assets) or a floating charge (on a class of assets).

How do debentures work?

Debentures work by allowing companies to borrow funds from investors without providing asset security. The lender receives a claim over the issuer’s assets, either as a fixed charge (specific assets) or a floating charge (general assets). This ensures debt recovery even if the issuer defaults.

Is a debenture a loan?

Yes, a debenture is a form of loan but differs from traditional loans in that it is typically unsecured. It represents a long-term borrowing by a company or government, backed by the entity's reputation and financial standing rather than collateral.

What are bonds and debentures?

Bonds are secured debt instruments issued by governments and corporations, backed by assets or collateral. Debentures, however, are usually unsecured and are issued based on the issuer’s credit profile. While both raise funds, their security structures and issuing entities often differ.

Are debentures assets or liabilities?

Debentures are liabilities for the issuer, representing borrowed funds to be repaid with interest. For the investor or lender, they are assets, signifying a financial claim on the issuer, typically with fixed income and principal repayment at maturity.

What do 12% debentures mean?

A 12% debenture means that the instrument will pay a 12% interest rate. If it has a face value of Rs 1000, then it will pay Rs 120 (1000*12%) as interest.

How to buy debentures?

Debentures are debt instruments issued by companies to raise loans from the market. They are similar to company fixed deposits, but offer higher returns (10-12%). NCDs can be bought in two ways: (1) subscribe when a company announces NCD or (2) buy later in the secondary market when it is trading.

Are debentures good or bad?

Debentures can be advantageous or risky depending on the context. They provide fixed returns and rank high in repayment order. However, they may restrict business flexibility and carry credit risk due to a lack of collateral. Investors should weigh risk versus return before investing.

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