Debentures - Definition and Features (Sec 2(30), Sec 44, Sec 71)
# Debentures: Concept and Features
Debentures are the formal acknowledgement of debt by a company. They are a key long-term financing tool and differ markedly from equity in rights and treatment.
## 1. Definition [Sec 2(30)]
> 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.
Key insight: 'Includes' makes the definition inclusive — bonds and stock are debentures; a charge is not essential.
## 2. Exclusions from 'Debentures'
(a) Instruments under Chapter III-D of the RBI Act
(b) Other instruments prescribed by the Central Government in consultation with RBI
## 3. Key Features of Debentures
Feature
Detail
Unit of loan
Smallest unit of a large loan
Certificate
Issued under common seal (if any) or signed by 2 directors / 1 director + CS
Interest
Periodic, pre-fixed rate, payable until redemption
Voting
No voting rights [Sec 71(2)]
Nature
Movable property [Sec 44], transferable as per AOA
Security
May be secured (charge on assets favouring trustee) or unsecured
Redemption
Lump sum at maturity OR by instalments (yearly/bi-yearly)
Convertibility
Terms may allow conversion to equity at maturity, at debenture holder's option
Certificate timeline
Within 6 months of allotment [Sec 56(4)(d)] unless restricted by law/court/tribunal
## 4. Equity vs Debenture (At a Glance)
Aspect
Equity Share
Debenture
Holder is
Owner
Creditor
Return
Dividend (discretionary)
Interest (mandatory)
Voting
Yes
No
Security on assets
No
May be secured
Priority on winding up
Last
Before equity
Worked example
### Example 1
Example 1 (Definition Test): A company issues an instrument labelled 'bond' without any charge on its assets. Is it a debenture under Sec 2(30)?
Answer:Yes. Sec 2(30) includes 'bonds or any other instrument...whether constituting a charge on the assets of the company or not.' Absence of a charge does not exclude it from being a debenture.
### Example 2
Example 2 (Voting Rights): D Ltd convenes its AGM. A debenture holder demands voting rights on a resolution to amend the AOA. Is the demand valid?
Answer:No. Sec 71(2) expressly states debentures do not carry voting rights. The debenture holder cannot vote at shareholders' meetings.
### Example 3
Example 3 (Certificate Timeline): P Ltd allotted debentures on 1st April 2024. By when must the certificate be issued?
Answer: Within 6 months of allotment, i.e., by 1st October 2024 [Sec 56(4)(d)], unless restricted by law, court, tribunal, or authority.
⚠️ Common exam mistakes
Believing a charge on assets is essential for an instrument to be a debenture — Sec 2(30) expressly says 'whether...or not'.
Assuming debenture holders can vote on company matters — they cannot, except in meetings of debenture holders themselves.
Confusing the certificate timeline for shares (2 months) with debentures (6 months).
Treating debentures as immovable property — Sec 44 makes them movable and transferable per AOA.
Forgetting that 'debenture' includes bonds and debenture stock — limiting the term to traditional 'debenture' instruments.
Bare-Act text Section 2(30); Section 44; Section 71 · Companies Act, 2013 · click to expand
Section 2(30): '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— (a) the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; and (b) 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.