Debentures and Securities

Learning Objectives

By the end of this topic, you should be able to:

• Define "debenture" (Section 2(30)) and "securities" (Section 2(81) read with the Securities Contracts (Regulation) Act, 1956) and explain how the two relate.
• Classify debentures: secured/unsecured, convertible/non-convertible, redeemable/perpetual, registered/bearer.
• Explain the conditions for issuing debentures under Section 71 — trustee appointment, Debenture Redemption Reserve (DRR), voting-rights prohibition.
• Describe charges (fixed and floating), their registration under Sections 77-87, and the consequence of non-registration.
• Compare a debenture-holder's position with a shareholder's.
• Apply remedies available to debenture-holders on default, including Section 71(10) NCLT relief and IBC routes.

Quick Answer

A debenture is a company's acknowledgment of debt — an instrument by which it borrows money from the public or institutions, promising interest and repayment, usually (but not necessarily) secured by a charge on its assets. Section 2(30) of the Companies Act, 2013 defines it inclusively to cover debenture stock, bonds and any instrument evidencing a debt. Debentures are one species of "securities," a broader term Section 2(81) borrows from the Securities Contracts (Regulation) Act, 1956, covering shares, bonds, derivatives and more. Section 71 governs their issue: convertible debentures need a special resolution, secured debentures need a debenture trustee and a charge created within statutory limits, certain issuers must maintain a Debenture Redemption Reserve, and debentures never carry voting rights. This topic matters because debt, not equity, funds most of corporate India — and the law here decides who gets paid when things go wrong.

Overview

Companies raise money two ways: by selling ownership (shares) or by borrowing (debentures, bonds, loans). Debentures let a company tap thousands of lenders at once on standard terms, and let investors earn fixed income senior to shareholders' claims.

Because debenture-holders are outsiders lending on the strength of documents, the law protects them structurally: a trustee to watch the company on their behalf, a registered charge so the security is public, a reserve so redemption money exists, and Tribunal remedies on default. The Companies Act, 2013 (mainly Sections 2(30), 2(81), 44, 71 and 77-87) supplies the company-law layer; SEBI's NCS (Issue and Listing of Non-Convertible Securities) Regulations govern public issues and listing; and the IBC, 2016 supplies the enforcement endgame.

Core Concepts

1. Meaning of Debenture — Section 2(30)

Definition: "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." The definition excludes instruments notified by the Central Government (in consultation with RBI) such as certain money-market instruments, and derivatives under the SCRA.

Explanation: Three points flow from the words. First, the definition is inclusive — courts look at substance: any instrument acknowledging indebtedness can be a debenture (Chitty's classic observation, adopted in Indian law, is that "debenture" has no precise legal definition). Second, security is optional — "whether constituting a charge... or not" means unsecured debentures are still debentures. Third, a debenture creates a creditor-debtor relationship: the holder is a lender, not an owner, so interest is payable regardless of profits, and Section 71(2) flatly prohibits issuing debentures with voting rights.

Example: A company issues 10,000 instruments of ₹1,000 each promising 9% annual interest and repayment in five years. Whether labelled "bond," "note" or "debenture," each is a debenture under Section 2(30).

Real-World Example: Non-convertible debentures (NCDs) of companies like Muthoot Finance or Tata Capital are routinely offered to retail investors and listed on stock exchanges — fixed-income products built entirely on this legal skeleton.

Why It Matters: Classification determines the rulebook: debt instruments attract Section 71, deposit rules (if they slip outside the exemptions), stamp duty and SEBI's NCS regime.

Common Misunderstanding: Quoting Section 2(22) or some other clause for the definition — it is Section 2(30). Also, "bond" and "debenture" are legally interchangeable in India; the market distinction (bonds = government/PSU, debentures = corporate) has no statutory basis.

2. Types of Debentures

Definition: Debentures are classified by security (secured/unsecured), convertibility (fully/partly/non-convertible), redeemability (redeemable/perpetual), and record-keeping (registered/bearer).

Explanation:

• Secured debentures carry a charge on company assets, enforced through a debenture trustee; the charge must be created within the period prescribed by the rules (Rule 18, Companies (Share Capital and Debentures) Rules, 2014 — secured debentures must be redeemable within 10 years, extendable to 30 for infrastructure and certain companies). Unsecured debentures rest purely on the company's covenant — and if they fall outside the exemptions in the deposit rules, they may be treated as deposits with far stricter conditions.
• Convertible debentures transform into equity: fully convertible (FCDs), partly convertible (PCDs), or optionally convertible. Conversion terms need a special resolution under Section 71(1). The Supreme Court in Narendra Kumar Maheshwari v. Union of India (AIR 1989 SC 2138) treated compulsorily fully convertible debentures as essentially equity-like, so they did not need the security appropriate to pure debt.
• Redeemable debentures are repaid on a date or schedule; perpetual (irredeemable) debentures have no fixed redemption date — permissible because the rule against perpetuities does not apply to a company's contractual debt.
• Registered debentures are transferable only by registration of transfer with the company; bearer debentures pass by mere delivery, like negotiable instruments (rare in modern practice, where dematerialised registered holdings dominate).

Example: A startup issues optionally convertible debentures to a venture-debt fund: 12% interest, with an option to convert into equity shares at a pre-agreed price within three years — debt that can become ownership.

Real-World Example: Infrastructure companies issue long-tenor secured NCDs (up to 30 years under the extended limit) to match the life of road or power assets, while banks issue perpetual debt instruments to count towards regulatory capital.

Why It Matters: "Classify debentures" is a guaranteed exam question, and each classification switches on a different compliance requirement (special resolution, trustee, DRR, deposit rules).

Common Misunderstanding: Assuming all debentures must be secured. Unsecured debentures are perfectly lawful; the trade-off is deposit-rule exposure and a weaker position in insolvency.

3. Issue of Debentures — Section 71 and the Debenture Trustee

Definition: Section 71 lays down the conditions of issue: special resolution for convertibles (S.71(1)); no voting rights (S.71(2)); DRR out of profits available for dividend (S.71(4)); appointment of debenture trustees before issuing a prospectus or making an offer to more than 500 persons (S.71(5)); trustee's duty to protect holders and redress grievances (S.71(6)); and payment of interest and redemption per the terms (S.71(8)).

Explanation: The debenture trustee (regulated by SEBI's Debenture Trustees Regulations, 1993) is the institutional watchdog: it holds the security on trust for all holders, monitors covenants and security cover, and can approach the NCLT under Section 71(9) if it believes the company's assets are or will be insufficient to discharge the principal — the Tribunal can then restrict the company from incurring further liabilities. Any term in the trust deed exempting the trustee from liability for breach of trust is void (S.71(7)), except a release approved by a three-fourths majority of holders. The Debenture Redemption Reserve requirement was substantially relaxed in 2019: listed companies (for public issues and private placements), NBFCs and housing finance companies now need no DRR; unlisted companies (other than NBFCs/HFCs) must maintain DRR of 10% of the value of outstanding debentures. Companies required to create DRR (and listed companies in lieu of it) must also invest or deposit, by 30 April each year, at least 15% of the debentures maturing that financial year in specified securities or deposits.

Example: An unlisted manufacturer issues ₹50 crore secured NCDs to 800 investors. It must appoint a SEBI-registered debenture trustee, execute a trust deed, create the charge, build a DRR of ₹5 crore from dividendable profits, and park 15% of each year's maturities by 30 April.

Real-World Example: In the DHFL and IL&FS crises, debenture trustees (like Catalyst Trusteeship and IDBI Trusteeship) became the front line for lakhs of retail NCD holders — invoking security, filing claims in insolvency, and illustrating why Section 71(5)-(6) forces a trustee between company and crowd.

Why It Matters: Section 71's checklist is the core of any problem question on a defective debenture issue, and the post-2019 DRR position is a current-law trap for students relying on old notes.

Common Misunderstanding: "Every company issuing debentures must create a DRR of 25%." Outdated twice over — the 25% figure was replaced, and listed companies/NBFCs/HFCs are now wholly exempt; only unlisted non-financial companies keep a 10% DRR.

4. Charges — Fixed, Floating, and Registration (Sections 77-87)

Definition: A charge (Section 2(16)) is "an interest or lien created on the property or assets of a company or any of its undertakings or both as security," including a mortgage. A fixed charge attaches to specific, identified assets; a floating charge hovers over a shifting class of assets (like stock-in-trade) that the company may deal with in the ordinary course of business until the charge crystallises.

Explanation: Secured debentures depend on charges, and charges depend on registration. Section 77 obliges the company to register every charge with the Registrar within 30 days of creation (extendable on payment of additional fees — up to 60 days, and a further 60 with ad valorem fees under the 2019 amendment). The Registrar issues a certificate, which is conclusive evidence of registration. The sanctions are severe: an unregistered charge is void against the liquidator and other creditors (S.77(3)) — the debt survives but becomes effectively unsecured in insolvency, and the money becomes immediately payable (S.77(4) proviso logic carried from the 1956 Act's Section 125 scheme). Section 78 lets the charge-holder register if the company fails to; Section 82 requires reporting satisfaction of charges; Section 85 mandates the company's own register of charges. A floating charge crystallises into a fixed charge on winding up, default triggering enforcement, or cessation of business — from that moment the company can no longer deal freely with the assets.

Example: A company creates a floating charge over its inventory and receivables to secure its NCDs but forgets to file the charge form. In liquidation, the debenture trustee's "security" is void against the liquidator — the holders queue up with unsecured creditors.

Real-World Example: Lenders and debenture trustees routinely check the MCA's public charge registry before extending credit — the registration system exists precisely so a new lender can discover that a company's assets are already mortgaged.

Why It Matters: The fixed/floating distinction plus the void-if-unregistered rule is among the most tested combinations in company law, and it drives real recoveries in every liquidation waterfall.

Common Misunderstanding: Thinking non-registration extinguishes the debt. It does not — the debt remains enforceable against the company; only the security is void against the liquidator and creditors.

5. Securities — Section 2(81) and the Wider Regulatory Web

Definition: Section 2(81) of the Companies Act, 2013 defines "securities" as securities defined in Section 2(h) of the Securities Contracts (Regulation) Act, 1956 — which covers shares, scrips, stocks, bonds, debentures, debenture stock and other marketable securities of a like nature, derivatives, units of collective investment schemes and mutual funds, security receipts, government securities, and rights or interests in securities.

Explanation: "Securities" is the umbrella; shares and debentures are its two great families. The classification matters because it selects regulators and rules: public offers of securities attract prospectus requirements (Sections 23-42 — notably Section 26 on prospectus contents, Section 42 on private placement), SEBI jurisdiction for listed/to-be-listed securities (Section 24), dematerialisation requirements, and the transferability principle in Section 44 — shares and debentures are movable property, transferable in the manner provided by the company's articles. Debentures issued to more than a threshold of persons must follow the private placement or public offer routes; a "deemed public offer" mistake (offering to more than 200 persons in a year outside exemptions) was at the heart of the Sahara litigation.

Example: A company "privately" allots optionally fully convertible debentures to thousands of investors, claiming no public issue occurred. The law treats an offer to 50+ persons (now 200 under the 2013 Act regime) as a public offer, dragging in prospectus and listing obligations.

Real-World Example: Sahara India Real Estate Corporation v. SEBI (2012) 10 SCC 603 — the Supreme Court held Sahara's OFCD issue to nearly 3 crore investors was a public issue in disguise, subject to SEBI jurisdiction, and ordered refund of over ₹24,000 crore with interest. It remains the defining case on the securities/public-offer boundary.

Why It Matters: Exams love the definitional chain (2(81) → SCRA 2(h)) and the Sahara facts; practice turns on choosing the right issuance route before raising a single rupee.

Common Misunderstanding: Reciting a self-contained Companies Act definition of securities. The 2013 Act deliberately has none — it incorporates the SCRA definition, so the two statutes must be read together.

Visual Learning

Lifecycle of a secured debenture issue:

Shareholder vs. debenture-holder at a glance:

Key Terms

Term	Definition	Context / Related Concepts
Debenture	Instrument evidencing a company's debt, with or without a charge	Section 2(30); includes bonds, debenture stock
Securities	Umbrella term from SCRA s.2(h): shares, debentures, bonds, derivatives, units etc.	Section 2(81), Companies Act, 2013
Charge	Interest or lien on company property as security, including mortgage	Section 2(16); registration under S.77
Fixed charge	Charge on specific identified assets	Company cannot deal with asset without consent
Floating charge	Charge over a shifting class of assets until crystallisation	Crystallises on default/winding up
Crystallisation	Conversion of a floating charge into a fixed charge	Freezes the company's freedom to deal with assets
Debenture trustee	SEBI-regulated trustee holding security for all holders	Mandatory for public issues / offers to >500 persons
Debenture trust deed	Document setting terms, covenants, security and trustee powers	Exemption clauses void: S.71(7)
DRR	Debenture Redemption Reserve from dividendable profits	10% for unlisted non-NBFC issuers; exemptions post-2019
NCD	Non-convertible debenture — pure debt, never becomes equity	Retail fixed-income staple; SEBI NCS Regulations
FCD / PCD	Fully / partly convertible debentures — convert into equity	Special resolution needed; Narendra Kumar Maheshwari
Private placement	Offer to a select group (max 200 persons/year, excluding QIBs and employees)	Section 42; breach = deemed public offer (Sahara)
Perpetual debenture	Debenture with no fixed redemption date	Lawful; rule against perpetuities inapplicable
Pari passu clause	Clause ranking all debentures of a series equally	Prevents priority by date of issue within a series

Common Mistakes

Mistake 1

• Misconception: "Debentures are defined in Section 2(22), and all debentures must be secured by a charge."
• Why it's wrong: The definition sits in Section 2(30), and its words — "whether constituting a charge on the assets of the company or not" — expressly contemplate unsecured debentures.
• Correct: Cite Section 2(30); classify secured vs. unsecured as a type, noting unsecured debentures may attract the deposit rules unless exempt.

Mistake 2

• Misconception: "Failure to register a charge within 30 days makes the loan and the charge void."
• Why it's wrong: Non-registration voids only the security as against the liquidator and other creditors (Section 77(3)); the underlying debt survives and in fact becomes immediately repayable. Also, extensions with additional/ad valorem fees are possible.
• Correct: Unregistered charge → lender is effectively unsecured in insolvency, but can still sue on the debt; register within 30 days (extendable) to preserve priority.

Mistake 3

• Misconception: "Debenture-holders can vote at general meetings if the trust deed allows it, and every issuer must maintain a 25% DRR."
• Why it's wrong: Section 71(2) prohibits issuing debentures with any voting rights — no deed can confer them. And the DRR regime was overhauled in 2019: listed companies, NBFCs and HFCs are exempt; unlisted non-financial companies maintain 10%, not 25%.
• Correct: Debenture-holders influence the company only through covenants, the trustee, and default remedies; state the current DRR figures.

Comparison and Connections

Feature	Share	Debenture
Holder's status	Member / part-owner	Creditor / lender
Return	Dividend — only from profits, if declared	Interest — fixed, payable irrespective of profits
Voting	Yes (equity; preference in limited cases)	Never (S.71(2))
Security	Never secured	May be secured by fixed/floating charge
Redemption	Equity generally not redeemable (buy-back/reduction aside)	Redeemable per terms; perpetual possible
Winding-up priority	Last (preference above equity)	Before all shareholders; secured holders rank with S.53 IBC waterfall
Governing provisions	Ss. 43-72 (share capital)	S.71, Ss.77-87 (charges), SEBI NCS Regs

Frequently confused pairs: debenture vs. deposit (unsecured debentures outside the exemptions are treated as deposits under Section 73 and the Deposit Rules); debenture vs. loan (a debenture is a marketable instrument, typically one of a series ranking pari passu; a loan is a bilateral contract); charge vs. pledge (a pledge needs delivery of possession; a charge does not).

Connections: this topic feeds directly into corporate finance (debt-equity mix), winding up (secured creditors and the waterfall), and shareholders' rights (the ownership side of the same capital-raising coin).

Practice Questions

Recall

1. Define "debenture" and "securities" under the Companies Act, 2013, citing the correct provisions. Answer guidance: Debenture — Section 2(30): includes debenture stock, bonds or any other instrument evidencing a debt, whether or not charged on assets (note the exclusions for prescribed money-market instruments/derivatives). Securities — Section 2(81), adopting SCRA 1956 Section 2(h): shares, bonds, debentures, derivatives, units, government securities etc.

2. List the conditions in Section 71 for the issue of debentures. Answer guidance: Special resolution for convertibles; no voting rights; DRR out of dividendable profits (as per current rules); debenture trustee for prospectus issues/offers to >500 persons; trust deed with void-exemption rule; duty to pay interest and redeem; trustee's S.71(9) petition power; holders'/trustee's S.71(10) remedy; penalty for default of Tribunal order (S.71(11)).

Understanding

3. Distinguish a fixed charge from a floating charge, and explain crystallisation. Answer guidance: Fixed — specific ascertained asset, company cannot deal with it freely. Floating — class of present and future assets (stock, receivables) the company uses in ordinary course; it "floats" until crystallisation (default/enforcement, winding up, cessation of business), when it fastens onto the assets then in the class. Explain why manufacturers need floating charges (they must keep selling inventory).

4. Why does the law force companies to register charges publicly? What happens if they don't? Answer guidance: Registration (S.77, 30 days, extendable) creates a public record so later lenders aren't deceived by secret encumbrances; certificate is conclusive evidence. Non-registration: charge void against liquidator and other creditors, debt becomes immediately payable, but debt itself survives. Charge-holder can self-register (S.78).

Application

5. Nova Ltd, an unlisted engineering company, wants to raise ₹100 crore through 7-year secured NCDs offered to 1,200 investors. Advise on the compliance steps. Answer guidance: Offer to >500 persons → mandatory debenture trustee (S.71(5)) and trust deed; offer to >200 persons in a year takes it beyond private placement (S.42) → public-offer route with prospectus (S.26)/SEBI NCS compliance; create and register the charge within 30 days (S.77); unlisted non-NBFC → DRR of 10% of outstanding debentures plus the 15% annual investment for maturities; tenor 7 years is within the 10-year cap for secured debentures.

6. Debenture-holders of Krish Ltd have not received interest for two quarters, and the trustee learns the secured assets have lost half their value. What remedies exist? Answer guidance: Trustee: petition NCLT under S.71(9) — Tribunal may restrict further borrowings; enforce security per trust deed. Holders/trustee: S.71(10) NCLT application for an order directing immediate repayment of principal and interest; contravention of the order is punishable (S.71(11)). As financial creditors, holders (through the trustee) may also initiate CIRP under Section 7 IBC if default ≥ ₹1 crore. Mention SEBI complaint route for listed NCDs.

Analysis

7. "A compulsorily fully convertible debenture is equity wearing debt's clothes." Discuss with reference to Narendra Kumar Maheshwari v. Union of India. Answer guidance: The Supreme Court reasoned that since CFCDs must become shares, holders are in substance future shareholders; security and DRR logic designed for repayable debt loses force. Analyse the substance-over-form method, then counter: until conversion, holders lack votes and rank as creditors; hybrid instruments deliberately exploit this duality (mezzanine finance). Conclude that classification should follow the dominant economic feature at each stage.

8. Evaluate whether the 2019 relaxation of the DRR requirement struck the right balance between issuer flexibility and investor protection. Answer guidance: For relaxation: DRR is an accounting reserve, not a cash pool — it never guaranteed repayment; listed issuers and NBFCs face SEBI/RBI oversight and disclosure; freeing profits lowers the cost of debt. Against: retail NCD investors lost a visible cushion just as DHFL/IL&FS defaults showed the risk; the 15% investment/deposit rule partially substitutes with actual liquid assets — arguably the more meaningful safeguard. Strong answers distinguish reserve (book entry) from the 15% deposit (real money).

FAQ

Q1. Are debenture-holders members of the company? No. Membership flows from holding shares. Debenture-holders are creditors: they cannot vote, attend general meetings as of right, or share in surplus profits — but they get paid before every class of shareholder.

Q2. Can a private company issue debentures to the public? No. A private company is prohibited from inviting the public to subscribe to its securities (Section 2(68)). It can issue debentures only by private placement under Section 42 (to a maximum of 200 persons per year, excluding QIBs and employee schemes) or to specified institutional lenders.

Q3. What is a debenture trust deed and why does it matter to an individual investor? It is the master contract between the company and the trustee setting out interest, redemption, security, covenants (like maintaining asset cover) and events of default. The individual investor's rights are enforced collectively through it — and Section 71(7) voids any clause exempting the trustee from liability for breach of trust, keeping the watchdog accountable.

Q4. Do debentures have to be redeemed within a fixed period? Secured debentures must be redeemable within 10 years of issue (30 years for infrastructure companies and certain other notified categories) under Rule 18 of the Share Capital and Debentures Rules. Unsecured and perpetual debentures are not bound by that cap, though perpetual instruments are largely the province of banks and large issuers.

Q5. If a company goes into insolvency, where do debenture-holders stand? Secured debenture-holders (through the trustee) are secured financial creditors — they sit on the Committee of Creditors in CIRP and rank high in the Section 53 waterfall (or can stand outside and enforce their security in liquidation). Unsecured debenture-holders rank as unsecured financial creditors — above government dues but below workmen and secured creditors.

Quick Revision

• Debenture: S.2(30) — instrument evidencing debt, charge optional; includes bonds and debenture stock.
• Securities: S.2(81) → SCRA 1956 s.2(h) umbrella — shares, debentures, bonds, derivatives, units.
• Types: secured/unsecured; fully/partly/non-convertible; redeemable/perpetual; registered/bearer.
• S.71 essentials: special resolution for convertibles; no voting rights ever; trustee mandatory for prospectus issues or offers to >500 persons; trust deed exemption clauses void.
• DRR today: listed cos., NBFCs, HFCs — exempt; unlisted others — 10% of outstanding debentures; plus 15% of maturing debentures invested/deposited by 30 April.
• Secured debentures: redeem within 10 years (30 for infrastructure).
• Charge (S.2(16)): register within 30 days (S.77, extendable); unregistered charge void against liquidator/creditors, but debt survives.
• Fixed charge = specific asset; floating charge = shifting class, crystallises on default/winding up.
• Remedies on default: trustee's S.71(9) petition; holders' S.71(10) repayment order; IBC S.7 as financial creditors.
• Private placement cap: 200 persons/year (S.42); breach = public offer — Sahara v. SEBI (refund of ₹24,000+ crore).
• CFCDs treated as quasi-equity: Narendra Kumar Maheshwari v. UOI.
• Shareholder = owner, dividend, vote, paid last; debenture-holder = creditor, interest, no vote, paid first.

Related Topics

Prerequisites

• 1. Introduction to Company Law — the company as borrower and issuer.
• 2. Company Formation — capital clause and borrowing powers.

Related

• 9. Corporate Finance — where debentures fit in the capital structure.
• 7. Shareholders Rights — the contrasting position of equity holders.

Next

• 5. Winding Up — how secured and unsecured debenture-holders fare in liquidation.
• 10. Mergers and Acquisitions — treatment of debt in schemes of arrangement.