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Debentures are long-term debt instruments that are issued by both private organisations and the government to raise funds. They are like a loan from investors to the company, but do not give up company ownership like shares.
And in return, you get regular interest payments. In simple terms, it’s like a certificate where the company promises to pay back your money with interest on a set date. But they also come with their own risks.
Want to understand what are debentures in detail? Read this article to learn everything about the product.
Who Can Buy Debentures?
First, let’s start with the most basic question. Who can buy debentures? Debentures are open to a wide range of investors who want fixed income. Anyone can invest, from resident individuals, Hindu Undivided Families (HUFs), companies, trusts, and even NRIs, depending on the issuer.
Most debentures are listed on stock exchanges like NSE or BSE. You can buy them through a demat account via your broker, like GoldenPi. Some of these debentures are also private for specific investors.
If you want to explore debentures, AAA or AA-rated bonds, or fixed deposits, you can consider the GoldenPi platform. Here, you can invest 100% digitally without making any branch visits. All you have to do is complete your KYC (if not registered), browse multiple investment options, and lastly make the payment.
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Types of Debentures
There are a lot of types of debentures, so let’s take a look at the main ones:
1. Secured Debentures:
Secured debentures are backed by company assets like property or machinery. If the company fails to pay, these assets can be sold to pay the investors. This type has a lower risk compared to the other forms of debentures.
2. Unsecured Debentures:
As the name suggests, unsecured debentures are the opposite of secured debentures, meaning they are not backed by any company asset. Instead, they rely on the company’s credit rating and reputation. They often mean higher risk, but also yield higher returns.
3. Convertible Debentures:
Convertible debentures can be converted into the company’s equity shares after a certain period of time. However, the conversion ratio is often predecided at the time of issue.
4. Non-Convertible Debentures:
Non-convertible debentures stay as debt until maturity. They cannot be converted into equity shares at any given point in time.
5. Redeemable Debentures:
Redeemable debentures have terms and conditions. They are paid at a set date or even before maturity.
6. Irredeemable or perpetual Debentures:
These debentures do not have a fixed repayment date and can stay unpaid until the issuer decides to pay on their own time. Due to this, they are also called perpetual debentures.
What Is the Difference Between Debentures and Bonds?
Bonds and debentures don’t have a huge difference and are both debt instruments that companies use to borrow money from investors. But the only big difference is in it’s security.
- Bonds are backed by assets, like property or equipment, so if the issuer can’t pay, bondholders can claim those assets.
- Debentures, on the other hand, are unsecured. They rely only on the issuer’s creditworthiness and promise to repay, which makes them riskier than bonds.
This leads to another key difference, which is interest rates. Bonds usually offer lower rates because they’re safer. But debentures carry higher interest rates to attract investors willing to take the extra risk.
Bonds also tend to have longer tenures and are often issued by governments or big firms, while debentures are short-term and more common from private companies.
Debentures Tenure and Interest Payment?
As long-term debt instruments, debentures are often issued for a longer period of time, like 5-10 years. The tenure also depends on the type of debenture, like perpetual debentures, which are often issued without a set maturity date and usually have a very long, unspecified tenure. However, they are rare in Indian markets.
On the other hand, secured debentures are typically redeemed within 10 years of issuance; however, larger projects like infrastructure finance can extend upto 30 years, as per the law.
Debenture interest rates, often called the coupon rates, usually range between 7-10% per annum, often even exceeding bank fixed deposits by yielding higher returns. These interests are paid on the face value (e.g., a 12% debenture with a ₹1,000 face value pays ₹120 per year). They are redeemed semi-annually or annually, depending on the terms of the issuer.
Debentures Taxation Rules?
Income from these debentures is fully taxable as per the tax slab under “Income from Other Sources”.
TDS on debenture income is mandatory under Section 193 of the Income Tax Act, 1961. The usual rate is of 10% for residents when interest payments exceed ₹5,000 in a financial year if the PAN details are provided. Without PAN details, the TDS rate is 20%. TDS for NRIs are governed as per Section 195 of the Income Tax Act.
Key Features of a Debenture Certificate
Here’s a quick look at what a debenture certificate usually covers:
| Feature | Details |
| Principal Amount | Money invested (e.g., ₹1,000 minimum often) |
| Coupon Rate | Fixed or floating interest % (usually 7-10%) |
| Maturity Date | When principal is repaid (5-10+ years) |
| Convertibility | Yes/No for equity conversion |
| Security | Secured by assets or unsecured |
| Credit Rating | AAA/AA, etc., shows risk level |
Potential risks to know
Debentures, though they yield higher returns, also come along with a greater set of risks. Let’s look at the potential risks to know about when thinking of investing in debentures:
- Credit Risk: The issuer may become a defaulter on interest or maturity payments, so it’s a must to check ratings from CRISIL/ICRA.
- Interest Rate Risk: Fixed-rate debentures lose value if the market interest rates rise.
- Liquidity Risk: Some debentures may have a limited number of sellers or buyers, making trading difficult.
In summary, debentures are a way for companies to borrow from you without giving up ownership. You earn predictable interest, often higher than FDs for good issuers. They suit conservative investors seeking better yields, but also come with higher risks.
How to Invest
If you want to explore debentures, AAA or AA-rated bonds, or fixed deposits, you can consider the GoldenPi platform. Here, you can invest 100% digitally without making any branch visits. All you have to do is complete your KYC (if not registered), browse multiple investment options, and lastly make the payment.
Debentures: Key Takeaways for Investors
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Definition: A debenture is a debt security used by companies to borrow money at a fixed rate of interest.
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Debenture Bonds vs. Shares: Investors become “creditors” rather than “owners,” meaning they receive interest payments regardless of company profit.
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Redeemable Debenture: These are instruments that the company is legally bound to pay back on a specific maturity date, providing a clear timeline for the return of principal.
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Types: Categories include Secured (backed by assets), Unsecured, Convertible (to equity), and Non-Convertible (NCDs).
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Interest & Tax: Interest (Coupon) typically ranges from 7-10% in India and is taxable as “Income from Other Sources.”
Debentures Related FAQs
1. What’s the difference between debentures and bonds?
Debentures are mostly corporate and unsecured; however, bonds are usually issued by the government.
2. Are debentures safe?
Debentures’ risk levels depend on the type of debentures. Secured debentures are usually safer than unsecured and perpetual debentures.
3. Can I sell debentures before maturity?
Yes, you can sell debentures if they are listed on stock exchanges like NSE and BSE.
4. What is the minimum investment in a debenture?
Some Public Sector bonds may start as low as ₹10,000; NCDs often require higher amounts. Minimum investment depends on the issuer, with no upper limit.
5. Can NRIs invest in debentures?
Yes, NRIs can invest in both private and government bonds in India via NRE/ NRO accounts under Portfolio Investment Schemes.
