Debenture

Section 2(30) of the Companies Act, 2013 provides that 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 proviso excludes instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934 and other instruments prescribed by the Central Government in consultation with the Reserve Bank. The essence is acknowledgment of a debt: a debenture holder is a creditor of the company, not a member.

This marks the difference from a share. A share under Section 2(84) is a share in the share capital of the company, and the shareholder owns part of the company, votes and receives dividends out of profits. A debenture holder lends money, is entitled to interest whether or not there are profits, and is repaid on redemption. Debentures may be secured by a charge or unsecured, and redeemable or convertible.

Section 71 lays down the main rules. A company may issue debentures with an option to convert them into shares wholly or partly at redemption, but such an issue must be approved by a special resolution at a general meeting (Section 71(1)). No company shall issue debentures carrying voting rights (Section 71(2)). Secured debentures may be issued subject to prescribed conditions, and a debenture redemption reserve is to be created out of profits available for dividend, subject to the rules. A company issuing a prospectus or offering debentures to the public or to more than five hundred members must first appoint one or more debenture trustees, who protect the interests of debenture holders (Sections 71(5) and 71(6)).

The term appears elsewhere too. Under Section 2(19) of the Code of Civil Procedure, 1908, a share in a corporation is deemed to include stock, debenture stock, debentures or bonds, which matters for attachment in execution. Examiners test the bar on voting rights, the special resolution for convertible debentures, the trustee requirement and this CPC definition.