The debentures were rated BB. He had not read this. He had read the headline interest rate: 10.5% per annum.
Shreya put the same amount into RBI floating rate savings bonds at 7.35%. She still holds them.
What Are Debentures?
Debentures meaning: debt instruments issued by a company to raise capital from the public, carrying a fixed rate of interest and a defined repayment date. The investor lends money to the company. The company pays interest and repays the principal at maturity.
What is debenture in accounting: a long-term liability on the company’s balance sheet. Debenture definition in practical terms: a loan to a company, documented as a certificate, with specified interest and repayment terms.
Debentures in company law: under the Companies Act 2013, debentures in company law include debenture stock, bonds, and any other instruments of a company evidencing a debt, whether constituting a charge on the assets of the company or not. The phrase “whether constituting a charge on the assets or not” is the phrase Mohan’s father needed to understand. He did not.
How do Debentures Work?
Issue of debentures: the company issues debentures at a face value, pays interest at a defined rate, and repays the face value at maturity. What do you mean by debentures in terms of mechanics: if you buy an NCD at Rs. 1,000 face value, 10% annual interest, three-year tenure, you receive Rs. 100 per year and Rs. 1,000 at the end of three years. Total: Rs. 1,300. Assuming no default.
Mohan’s father assumed no default. This was his entire analysis.
Types of Debentures
There are four main types of debentures. Two of them matter most for retail investors.
Secured debenturesBacked by a charge on the company’s assets. If the company defaults, the charge can be enforced and the assets can be sold to repay debenture holders. Mohan’s father did not hold these.
Unsecured debenturesNo charge on any asset. Higher interest rate offered as compensation. When the NBFC defaulted, there was nothing secured to enforce. Mohan’s father held these. He did not know the difference before he invested.
Convertible debenturesCan be converted into equity shares at a predetermined ratio on a specified date. Types of debentures used by companies wanting to offer equity upside alongside fixed interest.
Non-convertible debentures (NCDs)Cannot be converted into equity. Most retail debenture investments in India are NCDs.
Why Invest in Debentures?
Features of debentures that make them worth considering: fixed interest rate, defined maturity, and priority over equity shareholders in case of winding up.
The risk is not the product. The risk is the company. A 10.5% NCD from a BBB-rated company is a different risk from a 10.5% NCD from a BB-rated company. The interest rate looks the same. The probability of getting your money back does not.
Shreya chose 7.35% from the government. She knew exactly what she was giving up.
How to Invest in Debentures?
A KYC-verified demat account is required to buy listed NCDs and debentures. Open demat account via Aadhaar eKYC at Jainam Broking: 24 hours.
Step one is the credit rating. Not the interest rate. The interest rate is marketing. The credit rating is the analysis.
Step two is the security. Secured or unsecured. Mohan’s father learned this the expensive way.
Step three is the interest coverage ratio. EBIT divided by interest expense. Below 1.5x: struggling. Above 3x: comfortable. Mohan’s father’s NBFC had an interest coverage ratio of 1.1x in the year before he invested. This was in the public financial statements.
What is the Difference Between Debentures and Bonds?
Debentures
Bonds
A debt instrument issued by companies to raise long-term funds from investors.
A debt security issued by governments, corporations, or financial institutions to borrow money from investors.
Primarily issued by companies and corporations.
Issued by governments, public sector entities, municipalities, and corporations.
May be secured or unsecured depending on the issue terms.
Usually backed by specific assets, revenue streams, or government guarantees.
Generally carries higher risk, especially if unsecured.
Typically lower risk, particularly government bonds.
Pays a fixed or floating rate of interest called a coupon.
Pays periodic interest (coupon) to bondholders.
Highly dependent on the issuer’s creditworthiness.
Important, but government bonds often carry sovereign backing.
Usually medium to long-term (3–10 years or more).
Can range from short-term to very long-term (1–40 years).
Unsecured debentures may not have any collateral backing.
Many bonds are secured by assets or government guar
The 3.15% gap between the NBFC’s 10.5% and the RBI’s 7.35% was the price of the risk Mohan’s father was taking on. He thought he was just getting a better interest rate.
How Does a Platform Help Users Invest in Debentures?
Jainam Broking provides a KYC-verified demat account with NCD and debenture investment facility, credit rating data, and research reports on fixed-income instruments. Open demat account via Aadhaar eKYC at Jainam Broking 24 hours.
Shreya checks credit rating, interest coverage ratio, and issue of debentures terms before placing any order. Mohan’s father now uses the same process. He checks the credit rating before he reads the interest rate.
How to Evaluate the Risks Associated with Debentures?
Credit rating: AAA to D. Below BBB is speculative grade. Features of debentures that matter most for safety: the credit rating is the only filter that matters if you are a retail investor who cannot read financial statements. Mohan’s father’s NBFC was BB.
Interest coverage ratio: EBIT divided by interest expense. Below 1.5x is a warning. 1.1x is a danger sign. This was in the public accounts.
Security: Secured or unsecured. The answer to this question determines what happens when everything goes wrong.
Conclusion
Debentures meaning in one sentence: a loan to a company, paying fixed interest, at the risk of the company. What is debentures in a single question: is the company going to pay it back?
What is meant by debenture risk: it is entirely the issuer’s risk. A AAA-rated secured NCD is close to risk-free. A BB-rated unsecured debenture from an NBFC is not. They both say “fixed interest.” That is the only thing they have in common. What is meant by debenture safety: it is not a feature of the product. It is a feature of the company.Mohan’s father reads the credit rating now. He has not bought any debenture rated below AA since 2020.
Frequently Asked Questions
What is the meaning of debentures in finance?
Debentures meaning: debt instruments issued by companies to borrow money from investors at a fixed rate of interest, repayable at a specified maturity date. What is debenture in accounting: a long-term liability on the company’s balance sheet. Mohan’s father held debentures that were long-term liabilities on the NBFC’s balance sheet. When the NBFC defaulted, that liability was written off. His asset was written off with it.
Are debentures safe investments?
Debenture definition for a risk-aware investor: a fixed-income instrument whose safety depends entirely on the creditworthiness of the issuing company. AAA-rated secured NCDs are considered safe. BB-rated unsecured debentures are not. Mohan’s father thought fixed interest meant safety. It does not. It means predictable income assuming the company does not default.
Can individuals buy debentures?
Yes, through a KYC-verified demat account on NSE or BSE. What do you mean by debentures in terms of accessibility: minimum investment for most listed NCDs is Rs. 1,000 to Rs. 10,000. Shreya bought her first NCD at Rs. 10,000 in 2018. She now has a ladder of NCDs maturing every six months.
What returns can I expect from debentures?
AAA-rated NCDs: typically 6-8% per annum. Below BBB may offer 10-14%. The higher yield is the cost of the credit risk, not a bonus. Mohan’s father was offered 10.5% on BB-rated debentures. Shreya earned 7.35% on RBI bonds. 3.15% was the credit risk premium Mohan’s father did not know he was accepting.
How are debenture prices determined?
In the secondary market, debenture prices move inversely with market interest rates. If rates rise after the issue of debentures, the fixed-rate debenture’s price falls. If rates fall, the price rises. Shreya buys in the secondary market when the yield-to-maturity exceeds the current new issue rate for equivalent credit quality. She has a spreadsheet for this. She has had it since 2018.
What happens if a company defaults on its debentures?
Secured debenture holders enforce the charge on pledged assets through the NCLT. Unsecured debenture holders join the general creditors queue. Mohan’s father was unsecured. He has received Rs. 3 lakh out of Rs. 15 lakh. The process has taken four years.
How do I choose between different debentures?
Read the credit rating first. What is debentures selection in practice: ignore the interest rate until you have satisfied yourself on the credit rating, security type, and interest coverage ratio. Mohan uses this order now. Features of debentures that matter: credit rating, security, interest coverage ratio, in that order. The interest rate is last. Not first.
How can an online platform assist me in debenture investment?
A KYC-verified demat account at Jainam Broking provides NCD and debenture investment facility, credit rating data, research reports on fixed-income instruments, and a secondary market for buying and selling listed debentures. Open demat account via Aadhaar eKYC in 24 hours. Shreya checks the platform’s fixed-income research reports before investing in any types of debentures. She says the research report takes twenty minutes to read. Mohan’s father says twenty minutes would have saved him Rs. 12 lakh.
This blog is for general informational and educational purposes only and does not constitute financial, investment, tax, or legal advice. The information is based on publicly available sources and market understanding at the time of writing and may change due to global developments. Past performance of markets during geopolitical events does not guarantee future results. Readers are encouraged to conduct their own research and consult qualified professionals before making investment decisions. Jainam Broking does not provide any assurance regarding outcomes based on this information.
