Debentures are a type of debt instrument used by companies and governments to raise funds from the public. When an entity issues debentures, it essentially borrows money from investors at a fixed interest rate, promising to repay the principal amount at a specified maturity date. Debentureholders, therefore, act as creditors to the issuing entity.
In India, debentures are governed by the Companies Act, 2013, and the Securities and Exchange Board of India (SEBI) regulates the issuance and trading of debentures in the country.
The following entities can issue debentures in India:
- Companies: Both private and public limited companies can issue debentures to raise funds for various purposes, such as expansion, working capital, or debt refinancing.
- Government Entities: Government-owned companies and public sector undertakings (PSUs) can also issue debentures to finance their projects and operations.
- Financial Institutions: Financial institutions like banks, non-banking financial companies (NBFCs), and housing finance companies (HFCs) can issue debentures to raise capital.
- Infrastructure Companies: Infrastructure companies engaged in sectors like power, telecommunications, and transportation can issue infrastructure debentures to raise long-term funds for their projects.
Debentures can be classified into various types based on their features, such as:
- Secured Debentures: Backed by specific assets of the issuing company, providing additional security to investors.
- Unsecured Debentures: Not backed by any specific assets, making them riskier but often offering higher returns.
- Convertible Debentures: Can be converted into equity shares of the issuing company after a specified period.
- Non-Convertible Debentures (NCDs): Cannot be converted into equity shares and are repaid as per the agreed terms.
- Redeemable Debentures: Have a fixed maturity date when the issuing company must repay the principal amount.
- Perpetual Debentures: Do not have a fixed maturity date and pay interest indefinitely.
Investors should carefully assess the terms and conditions of the debentures before investing, including the interest rate, redemption period, credit rating, and other relevant details.