What are debentures used for?
A debenture bond is very often used by both the government and various corporations to raise capital or funds
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What is a Debenture? Meaning, Types, Features & Benefits
By Bajaj Broking Team
14 October 2026
4 mins read
Bonds
Summary:
A debenture is a type of debt instrument that lets companies or governments borrow from investors without offering specific collateral. In return, investors get fixed interest at set intervals and the principal back at maturity. Some debentures are convertible, some are not, and a few may even be secured. So returns depend on the terms of the debenture, but there is still credit, interest rate, inflation, and liquidity risk, which is why the issuer’s rating matters so much.
A debenture is a debt instrument that allows investors to lend money to a company for a specified period. In return, the company generally pays periodic interest and repays the principal amount on maturity.
So, if you are investigating fixed income investments, you may find debentures listed alongside other options, such as fixed deposits or bond investment India opportunities. However, the nature of how debentures work is different from the other two types of investments based on their structure, type of issuer, security, and repayment timeframes.
To understand how debentures operate within the overall financial markets, it's a good idea to learn about the various types of debentures, as well as debenture features, working mechanisms, pros and cons, and investment processes.
Types of Debentures
Various ways for companies to issue debentures exist to satisfy their different funding needs. Different classes of debentures are based on different characteristics, including security, convertibility, duration, and how they will be redeemed.
Recognizing the various classes of debenture will assist you in determining how the same form of debenture functions in the Indian financial marketplace.
Registered:
These are the types of debentures that are registered to the issuer. Any further transfer or trades of these debentures that lead to changes in their ownership are then alerted to the issuer through a clearing facility. This helps them pay interest to the correct bondholder.
Bearer
A bearer debenture is the opposite of a registered debenture where the debenture is not registered with the issuer and the ‘bearer’ of the debenture is entitled to interest simply because they hold the bond.
Redeemable
Debentures that are transparent about the exact terms and date by which the issuer of the bond must repay their debt in full are known as redeemable debentures.
Irredeemable
Irredeemable, also known as non-redeemable or perpetual debentures do not hold the issuer liable to repay in full by a certain date.
Convertible
These debentures can be considered a hybrid financial instrument as they come with the benefit of both equity and debt. This is because convertible debentures, after a specific time, get converted into equity shares of the corporation that issued them. These are more attractive to those investors who feel that the company's stock will rise in the long term. This conversion to equity however comes at an additional cost as the interest rate of these debt instruments are usually very low.
Non-Convertible
As the name suggests, nonconvertible debentures, cannot be converted into equity of the issuing company. However, because of this rigidity, these debentures do offer a higher interest rate to their investors when compared to convertible debentures.
How Do Debentures Work?
A company may seek more money for its growth or operations or its long-term projects. Rather than issuing new shares, they can raise capital through the issuance of debentures. The debenture agreement includes the interest payment, the maturity period, how to repay, and the investor's rights.
Knowing what each of these components means can help you understand how debentures work, as well as how issuers and investors will interact during the investment period.
Company Issues Debentures
Issuing a debenture allows a company to raise funds by offering them to investors. The issue document will set out the interest rate, maturity period, repayment terms and conditions of the debenture issue. Investors will review these terms before participating in the debenture issuance process.
Investors Subscribe to the Issue
Investors interested in the debentures will apply during the issue period. After allotment of the debentures they will appear in the investor's account. The company will use the issue proceeds for their intended purpose.
Periodic Interest Payments
The issuer generally makes interest payments to the investor on a regular schedule throughout the investment term. Interest payments depend on the issue terms and may be made monthly, quarterly or annually or according to some other pre-determined schedule.
Features of a Debentures
The features of debentures differentiate them from equity shares, and many other investment vehicles. These features allow debenture issuers to raise funds and provide investors with a return on their investments throughout the term of their investment.
Fixed Maturity Period
The majority of long-term investments in debentures are for a fixed period, whereby the company agrees to pay back the amount borrowed at an agreed-upon maturity date. Because of this structure, an investor can determine how long their investment will last right from the start of the investment.
Interest-based Returns
Debenture investors typically receive periodic interest payments during their time of investment, with the timing and amount of interest being predetermined in the issue terms.
As long as the debenture remains on issue, the investor will continue receiving income from the agreed-upon interest structure of that particular debenture.
Tradable in Certain Cases
Some debentures are listed on the stock exchange and may be traded on the secondary market. Having the ability to trade a debenture before maturity may give an investor the flexibility they need to transfer ownership before the final maturity date.
Advantages and Disadvantages of Debentures
Debentures come with real benefits, but like most fixed-income options, they carry a few trade-offs too. Here's what to weigh on both sides before investing.
Advantages of Debentures
Fixed returns: You get a set interest rate, so your income stays predictable no matter how the company's stock performs.
Priority over shareholders: If the company goes into liquidation, debenture holders get paid before equity shareholders. That makes debentures somewhat safer than stocks.
No ownership dilution: Debentures represent debt, not equity, so you don't get voting rights, but the company also avoids diluting ownership among its shareholders.
Portfolio diversification: Holding debentures alongside equities helps balance out riskier investments with something steadier and more income-focused.
Tradability: A lot of debentures get listed on stock exchanges, so you can buy or sell them before maturity if you need liquidity.
That said, debentures aren't without drawbacks.
Disadvantages of Debentures
Interest rate risk: When market rates climb, older debentures with lower fixed rates lose some appeal, and their resale value can drop.
Credit risk: If the company runs into financial trouble, it might miss interest payments or fail to return the principal when the debenture matures.
No ownership benefits: You won't get voting rights or a cut of company profits beyond the interest you were promised.
Inflation impact: Because the returns are fixed, inflation can quietly eat into the real value of what you earn over time.
Limited growth potential: Unlike stocks, debentures don't give you any extra upside even if the company does exceptionally well.
Additional Read: Difference Between Bonds and Debentures
Factors to Consider Before Investing in Debentures
When considering investing in debentures, below is a list of some of the factors that need to be kept in mind.
Trading Debentures
Debentures are traded in the secondary market
Investors can buy/sell them after they have been issued
Debenture trading is similar to equity trading
However, debenture trading also has lower volatility and less exposure to market risk.
Regulatory Framework Involved
Regulations like SEBI guidelines and provisions of the Companies Act, monitor the issuing of debentures
This ensures transparency and protects the investor.
The Companies Act also lists the requirement for a debenture redemption reserve.
How Debentures are Structured?
Below is a detailed account of how debentures are structured:
Debentures are used by corporations to raise capital through potential investors.
The element of the “Indenture,” which is a legal document, encompasses all the terms and conditions of a debenture
The indenture can also hold details about whether or not debenture holders have the right to convert their holdings into equity shares of the company.
The interest rate is another important component of the debenture as it points towards the annual returns an investor gets as a top-off to the principal investment till the debenture matures
The maturity date of a debenture lists the exact date on which the issues need to repay the principal amount to the investors providing clarity to them.
Some debentures are also backed by collateral in the form of specific assets, which can be liquidated to repay the investors, protecting them from default or financial distress
How Debentures are Different From Bonds, Shares & Loans
Listed below are the differences between debentures, bonds, shares and loans
Aspect | Debentures | Bonds | Shares | Loans |
|---|---|---|---|---|
Investment Type | Debt instruments usually with a fixed interest rate issued by a company or government | Debt instruments with fixed interest payments issued by governments or corporations, | Shares represent a share of a company’s assets and profits and indicate part ownership in it | A sum borrowed which the borrower is obliged to repay along with interest. |
Returns | Repayment of the principal amount along with the Interest payments received | Repayment of the principal amount along with the Interest payments received | Returns are received in the form of dividends if and when the company profits. | Repayment of the principal amount along with the Interest payments given |
Security | Usually secured by a charge on its assets. | Usually backed by a repayment guarantee and sometimes secured/ unsecured by the issuer’s assets | No repayment obligation. | Lenders usually rely on a borrower’s creditworthiness. |
Risk | Less risky than equities but more than loans. | Government bonds are considered less risky than corporate bonds. | Quite risky because of the constant market fluctuations | Depends on the borrower’s creditworthiness |
Ownership | Holder has no ownership stake | Holder has no ownership stake | Investors have ownership and voting rights | No ownership stake |
Interest Rate | Usually fixed interest rate. | Usually fixed interest rate. | Interest rate not valid. | Fixed interest rates are usually pre-set by the lender |
Market Trade | Market trading is possible | Market trading is possible | Traded in the stock market. | No trading involved |
Priority | Higher priority for debenture holders during liquidation compared to shareholders. | Higher priority for bondholders during liquidation compared to shareholders. | Very low on the priority list where liquidation is concerned | Lender has first right to payment |
Risks Involved in Investing In Debentures
Additional Read: Difference Between Shares And Debentures Explained
Some of the risks involved in investing in debentures are listed below:
While debentures are comparatively a low-risk investment option, they do hold a few risks without a doubt
These include credit risk where there is a risk of default by the issuing company
Even though debentures usually have a fixed interest rate, any changes will affect debenture value.
With inflation risk comes the fear of the value of the investment eroding over time.
Investors also need to consider the liquidity risk in debentures in case they are not able to sell when needed.
Debenture Stock
Debenture stock refers to a form of debt instrument issued by a company, typically in large denominations, that is backed by a certificate outlining the terms of repayment and interest. Unlike individual debentures, debenture stock may be divided into smaller portions and is often transferable. It represents the total sum borrowed by a company from the public and is typically secured by the company’s assets.
Holders of debenture stock are known as debenture stockholders and are entitled to receive fixed interest at regular intervals. This instrument is frequently issued for long-term borrowing and plays a significant role in corporate capital structuring. The interest is usually paid irrespective of the company's profitability.
How to Invest in Debentures in India?
There are multiple steps and processes to consider when making an investment in debentures. A better understanding of the following processes will allow you to successfully navigate through the debenture investment process in terms of general access via regulated financial channels in India.
Open a Demat Account
Most debentures are held electronically, so you will need a demat account to receive, maintain and manage your debenture investments. The demat account will be your main source for maintaining your investment records.
Review Available Debenture Issues
Companies periodically issue debentures to investors. Before selecting which debenture issues to invest in, you will want to review the issue documents, interest structure, length of the term, and the credit rating on that debenture issue.
Apply Through Authorised Platforms
Most applications for debentures are through your investment authorised agency. Your debentures will be credited to your account once the application has been processed, and you have been allocated your debentures.
Additional Read: Difference Between Bonds and Debentures
Example of Debenture
An example of a debenture can be illustrated by a company issuing ₹10 crore worth of debentures to raise capital for expansion. Each debenture is valued at ₹1,000 and carries a fixed annual interest rate of 10%. These are offered to investors for a defined tenure, say 5 or 10 years. The company agrees to repay the principal amount at maturity.
Such debentures may be either secured or unsecured, depending on whether assets are pledged. Investors receive regular interest payments during the term. This form of borrowing helps the company access funds without diluting ownership, making debentures a common financing tool in structured corporate debt.
Frequently Asked Questions
Is debenture a loan?
A debenture bond is a debt instrument for investors that does not have the backing of collateral.
How does a debenture differ from a bond?
Debentures are usually not secured by any physical assets by the issuers whereas bonds are secured by physical assets by the issuer
Why do companies issue debentures?
Companies issues use debentures to raise capital for their business developments
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Investments in securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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Content Partner - Dalal Street Investment Journal Wealth Advisory Private Limited
This article is for educational purposes only and should not be considered investment advice. Market investments are subject to risks. DSIJ Wealth Advisory Private Limited is a SEBI-registered Research Analyst (Reg. No: INH000006396) and Investment Adviser (Reg. No: INA000001142). Please consult your financial adviser before investing.
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Publish Date:
14 Oct 2026
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Bajaj Financial Securities Limited and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company(ies), mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company(ies) discussed herein or act as advisor or lender/borrower to such company(ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. Bajaj Financial Securities Limited may have proprietary long/short position in the above-mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and do not consider risk appetite or investment objective of any particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with Bajaj Financial Securities Limited.
Bajaj Financial Securities Limited or its associates may have received compensation from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have managed or co-managed public offering of securities for the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Bajaj Financial Securities Limited or its associates have not received any compensation or other benefits from the Subject Company or third party in connection with the research report. Research analyst or his/her relative or Bajaj Financial Securities Limited’s associates may have financial interest in the subject company. Bajaj Financial Securities Limited, its associates, research analyst and his/her relative may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance.
Research analyst has served as an officer, director or employee of subject Company: No
Bajaj Financial Securities Limited has financial interest in the subject companies: No
Bajaj Financial Securities Limited’s Associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report.
Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No
Bajaj Financial Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No
Subject company may have been client during twelve months preceding the date of distribution of the research report.
There were no instances of non-compliance by Bajaj Financial Securities Limited on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years. A graph of daily closing prices of the securities is also available at NSE
ANALYST CERTIFICATION
The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
RISK DISCLOSURE ON DERIVATIVES
- 9 out of 10 individual traders in equity Futures and Options Segment, incurred net losses.
- On an average, loss makers registered net trading loss close to ₹ 50,000.
- Over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.
- Those making net trading profits, incurred between 15% to 50% of such profits as transaction cost.
SEBI study dated January 25, 2023 on “Analysis of Profit and Loss of Individual Traders dealing in equity Futures and Options (F&O) Segment”, wherein Aggregate Level findings are based on annual Profit/Loss incurred by individual traders in equity F&O during FY 2021-22.
BROKERAGE DISCLAIMER
All leveraged intraday positions will be squared off on the same day. There is no restriction on the withdrawal of the unutilised margin amount. Brokerage will not exceed the SEBI prescribed limit. Visit : Pricing
MTF
As subject to the provisions of SEBI Circular CIR/MRD/DP/54/2017 dated June 13, 2017, and the terms and conditions mentioned in the lights and obligations statement issued by the TM (if applicable).
US INVESTING
International investment is not supervised by any regulatory body in India. Thus, any claim or dispute relating to such investment or enforcement of any agreement/contract /claim will not be under laws and regulations of the recognized stock exchanges and investor protection under Indian Securities Law. The account opening process will be carried out on Vested platform and Bajaj Financial Securities Limited will not have any role in it.
IPO
This should not be construed as soliciting investment. Investors’ discretion is required. Kindly consult your financial expert before investing. No need to issue cheques by investors while subscribing to IPO. Investments in securities markets are subject to market risks, read all the related documents carefully before investing.
SCREENERS
Screeners is not Exchange-approved products and any disputes related to the same will not be dealt on the Exchange platform.
SECURITIES
Securities quoted are exemplary and not recommendatory.
IPV
Account would be open after all procedure relating to IPV and client due diligence is completed.
IMAGES
The images used are only for representation purpose. Proper due diligence has been done for the images and the image is not of any artist. The same is captured from royalty free sites.
THIRD PARTY PRODUCT DISCLAIMER
Bajaj Financial Securities Limited is a distributor for Non-Broking Products/Services such as Mutual Funds, Mutual Funds SIP, IPO, Bonds, Insurance, PMS, Global Investing, any other third-party products/services. These are not Exchange Traded Products, and we are only acting as distributors. All disputes with respect to the distribution activity, would not have access to SCORES/ODR, Exchange investor redressal forum or Arbitration mechanism. Please refer to the detailed disclaimer for Third-Party Products.
DISCLOSURE TO CLIENTS REGARDING PAYOUT OF FUNDS
As per SEBI circular no. SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/84 dated June 08, 2023, Stockbrokers are required to upstream the entire client funds lying with them to the Clearing Corporation. Based on client’s request the funds’ release request must be placed with the Clearing Corporation. Based on the internal process and cut-off timelines of the Clearing Corporation the funds will be released to the Stock Broker. In view of this new process, as specified by the regulatory and the cut-off time of Clearing Corporation/Banks processing the funds, Bajaj Financial Securities Limited cannot commit the exact time for releasing funds payout to its client. Clients are requested to note that, Bajaj Financial Securities Limited will not be responsible for any inconvenience caused to clients due to delay in release of funds payout, including fines, delayed charges, defaults, etc.