Company Law and Practice · Debt Instruments - Concepts

Meaning and Features of Debentures under Companies Act, 2013

Updated 11 October 2026 · Fact-checked

Under Section 2(30) of the Companies Act, 2013, a **debenture** includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether or not it creates a charge on the company's assets. A debenture holder is a creditor, not an owner. Answer by giving the definition, features, and the difference from shares.

Understand Meaning and Features of Debentures

A company needs money. It can raise it from owners by issuing shares, or it can borrow. A debenture is a way of borrowing. The company issues an instrument that records the debt. The person who holds it has lent money to the company.

Section 2(30) says a 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". Note the word "includes". The definition is wide. The test is simple: does the instrument evidence a debt of the company? Security is not required. So a debenture can be secured (with a charge) or unsecured (without one).

The definition has a proviso. These are not treated as debentures: (a) the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934, and (b) such other instruments, issued by a company, as the Central Government prescribes in consultation with the Reserve Bank of India.

Because a debenture holder is a creditor, the company owes interest and repayment whether or not it makes a profit. A shareholder is a member and an owner. Dividend depends on profits and on the company's decision to declare it. This one idea explains most of the differences between shares and debentures.

Debentures are usually issued with a stated rate of interest and a stated time for repayment. They can be redeemable (repaid at a fixed time) or, where the law permits, convertible into shares. Kinds and issue procedure are separate topics. Here you need the meaning, features and the contrast with shares.

Key rules to remember

Definition of debenture: Debenture = debenture stock + bonds + any other instrument of a company evidencing a debt (charge on assets or not); Section 2(30). The word "includes" makes the definition inclusive, not exhaustive.
Exclusions from debenture: Not a debenture: (a) instruments under Chapter III-D of the RBI Act, 1934; (b) other instruments prescribed by the Central Government in consultation with the RBI; Proviso to Section 2(30). Do not forget it in a full definition answer.
Debenture holder's status: Debenture holder = creditor; shareholder = member (owner); Interest is a debt payable even without profit; dividend is paid out of profits as decided by the company.
Meaning of share: Share = a share in the share capital of a company, and includes stock; Section 2(84). Use it as the starting point for the contrast.
Meaning of member: Member = subscriber to the memorandum, a person who agrees in writing and is entered in the register, or a person holding shares who is a beneficial owner in a depository's records; Section 2(55). A debenture holder does not appear here merely by holding debentures.

How to solve Meaning and Features of Debentures questions

Use this order for any question on meaning, features or comparison of debentures.

1Start with the provision: quote Section 2(30) in your own words. Say it includes debenture stock, bonds and any other instrument evidencing a debt.
2State the key point: the instrument evidences a debt, and a charge on assets is not necessary.
3Mention the proviso: Chapter III-D RBI Act instruments and instruments prescribed by the Central Government are not debentures.
4List the features: creditor status, fixed interest, repayment, security optional, no voting rights, can be redeemable or convertible where permitted.
5If asked for a comparison, draw two columns of points: basis, status, return, voting, risk, repayment, security. Give a point for each.
6Apply to the facts: decide whether the person in the case is a creditor or a member and what follows from it.
7End with a clear conclusion in one sentence.

Quickest way: Debt test and creditor-owner test

When to use it: Use when you have a few minutes and the question asks for the meaning, features or the difference between shares and debentures.

Write Section 2(30) in one sentence, including the proviso.
Apply the debt test: does the instrument evidence a debt of the company? If yes, it fits the definition.
Apply the creditor-owner test: debenture holder is a creditor; shareholder is an owner.
Derive the differences from this one test: interest versus dividend, no voting versus voting, repayment versus no repayment in the normal course, security versus none.
Write the conclusion.

Common mistakes in Meaning and Features of Debentures

Saying a debenture must always be secured by a charge on assets.
Most textbook examples show secured debentures, so students assume security is compulsory.
Fix: Quote the words "whether constituting a charge on the assets of the company or not" from Section 2(30). Unsecured debentures are also debentures.
Calling a debenture holder a member or part-owner of the company.
Students mix up debentures with shares because both are 'securities' issued to raise funds.
Fix: A debenture holder is a creditor. Section 2(55) defines member by reference to the memorandum, the register of members or depository records of shareholding. Debenture holding is not shown there.
Writing that interest on debentures is paid only out of profits.
Students carry over the rule for dividend.
Fix: Interest is a debt. It is payable whether or not the company earns a profit. Dividend is the return on shares and depends on profits and declaration.
Omitting the proviso to Section 2(30) in a definition answer.
Students memorise only the first line of the definition.
Fix: Add one line: Chapter III-D RBI Act instruments and other instruments prescribed by the Central Government in consultation with the RBI are not treated as debentures.
Claiming debenture holders have voting rights at general meetings.
Students assume every security holder can vote.
Fix: Voting is a right of members. Debenture holders, as creditors, do not vote in the company's general meetings merely by holding debentures.
Listing differences without a basis, such as 'debentures are safer' with no reason.
Students memorise points without understanding the creditor-owner idea.
Fix: For each difference, state the reason: the creditor is repaid first and has a fixed claim, so the risk is lower than for an owner.

Worked examples

Example 1

Define a debenture under the Companies Act, 2013 and explain its main features. (Answer in ICSI style.)

Show the solution

Provision: Section 2(30) says a 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.
Proviso: instruments referred to in Chapter III-D of the RBI Act, 1934, and other instruments prescribed by the Central Government in consultation with the RBI are not treated as debentures.
Feature 1: It evidences a debt. The holder is a creditor of the company, not a member.
Feature 2: It normally carries a fixed rate of interest, payable whether or not the company has profits.
Feature 3: It is usually repayable after a stated period, so it can be redeemable; where the law permits it may be convertible into shares.
Feature 4: It may be secured by a charge on the company's assets or may be unsecured.
Feature 5: It gives no ownership or voting right in the company's general meetings.
Conclusion: A debenture is a company's debt instrument, and its holder is a creditor entitled to interest and repayment.

Answer: A debenture is an instrument of a company evidencing a debt (Section 2(30)), with or without a charge on assets. Its features are creditor status, fixed interest, repayment, optional security and no voting right.

Example 2

Meera holds 1,000 equity shares of ₹10 each in Sundaram Textiles Ltd. Arjun holds debentures of ₹10,000 in the same company at 9% interest per year. In a year the company makes a loss and declares no dividend. Can Arjun claim his interest? Can Meera claim a dividend? Can either vote at the general meeting?

Show the solution

Provision: A debenture under Section 2(30) is an instrument evidencing the company's debt. Arjun lent money, so he is a creditor.
Meera holds shares (Section 2(84)) and is a member (Section 2(55)). She is an owner.
Arjun's interest: it is a debt owed at the agreed rate. Interest for the year = 9% of ₹10,000 = ₹900. The loss does not remove the obligation, so Arjun can claim ₹900.
Meera's dividend: dividend depends on profits and on the company declaring it. No dividend has been declared, so Meera cannot claim one.
Voting: Meera, as a member, has voting rights as per the Act and the articles. Arjun, as a debenture holder only, is not a member and has no right to vote at general meetings by reason of his debentures.
Conclusion: the creditor is paid first regardless of profit; the owner gets a return only if a dividend is declared.

Answer: Arjun can claim interest of ₹900 because he is a creditor. Meera cannot claim a dividend as none is declared. Meera, as a member, can vote; Arjun cannot vote merely as a debenture holder.

Exam tips

Always quote Section 2(30) with the proviso. Examiners expect the section number and the key words 'evidencing a debt'.
For 'difference between shares and debentures', give 6 to 8 points on a clear basis: status, return, voting, repayment, security, risk, conversion.
Use a short example with rupee figures to show interest versus dividend. It makes the answer concrete.
Do not state section numbers you are unsure of. Use Section 2(30), 2(84) and 2(55) from the definitions and describe other rules in plain words.
Finish case-based answers with a one-line conclusion stating whether the person is a creditor or a member.

Practice questions from Debt Instruments - Concepts

Meaning and Features of Debentures in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Meaning and Features of Debentures: frequently asked questions

What is a debenture under Section 2(30) of the Companies Act, 2013?

It includes debenture stock, bonds or any other instrument of a company evidencing a debt. It does not matter whether it creates a charge on the company's assets. Certain RBI Act instruments and notified instruments are excluded.

What is the main difference between shares and debentures?

A shareholder is a member and owner who gets dividend if declared. A debenture holder is a creditor who gets interest and repayment. Shareholders vote at general meetings; debenture holders do not vote merely as such.

Does a debenture have to be secured?

No. Section 2(30) covers a debenture whether it constitutes a charge on the company's assets or not. So unsecured debentures are also debentures.

Is interest on debentures payable even if the company has a loss?

Yes. Interest is a debt owed to the creditor on the agreed terms. It does not depend on profits, unlike dividend on shares.