What is a debenture in accounting?

A debenture is a debt instrument issued by a company to borrow money. In accounting, it is recorded as a borrowing or financial liability. The company records interest expense over time and repays the principal as per the terms of issue.

What is the difference between debentures and shares?

Debentures represent borrowed money, while shares represent ownership capital. Debenture holders are creditors and receive interest. Shareholders are owners and may receive dividends if the company earns profits and declares them.

Are debentures secured or unsecured?

Debentures may be issued with or without security. If a debenture is secured, the company gives debenture holders a charge over specific assets as protection against default. If it is unsecured, the holder does not have a claim over any particular asset and depends mainly on the company’s repayment ability.

Are bearer debentures legal in India?

Bearer debentures are mainly of historical and academic relevance in modern Indian practice. Current securities systems generally require proper ownership records or dematerialised holdings. It is safer not to state broadly that bearer debentures are “illegal” unless a specific legal source is cited for that exact claim.

What is the difference between debentures and bonds?

In India, the terms debenture and bond are often used interchangeably. The Companies Act definition of debenture includes bonds. The practical difference depends on the instrument terms, such as security, maturity, issuer, listing status, and repayment conditions.

Is interest on debentures tax-deductible?

Interest on borrowed capital used for business purposes is generally deductible, subject to conditions under the applicable income tax law. For content updated in 2026, references should consider the Income-tax Act, 2025, which came into force from April 1, 2026.

Can a private limited company issue debentures?

Yes, a private limited company can issue debentures, subject to the Companies Act, 2013, private placement rules, approvals, filings, and other applicable conditions. If the debentures are secured, charge creation and registration requirements must also be followed.

What is the accounting entry for issue of debentures at discount?

When debentures are issued at a discount, the company receives less money than the face value of the debentures but still records the full liability. The discount represents a finance cost or deferred expense that is accounted for as per the applicable accounting treatment.

What happens to debentures during liquidation?

Secured debenture holders have a claim over the charged assets, subject to applicable law and the terms of security. Unsecured debenture holders rank as unsecured creditors. Both are paid before equity shareholders, but their exact priority depends on the type of debt, security, and insolvency or liquidation framework.

Types of Debentures in Accounting: Meaning, Features, and Examples

Q: What is DRR?

DRR stands for Debenture Redemption Reserve. It is a reserve created out of profits for the redemption of debentures. However, DRR is not mandatory for every company. Its applicability depends on the type of company and the nature of the debenture issue.

Updated May 18, 2026

May 12, 2025

12 min

By Nishant

Quick Summary

Debentures are debt instruments issued by companies to raise funds without giving ownership rights to investors.
Under the Companies Act, 2013, debentures include debenture stock, bonds, and other company instruments that evidence a debt, whether secured by company assets or not.
Debentures can be classified as secured, unsecured, convertible, non-convertible, redeemable, zero-coupon, registered, or market-linked, depending on their terms.
Debenture holders are creditors of the company. They do not gain voting rights merely by holding debentures.
Debenture Redemption Reserve, or DRR, is not mandatory for every company. Its applicability depends on the type of company and the nature of the debenture issue.
For accounting purposes, debentures are shown as borrowings. Long-term debentures are shown under long-term borrowings, while current maturities are shown separately under current liabilities or other financial liabilities, as applicable.

What Is a Debenture?

A debenture is a debt instrument issued by a company to borrow money from investors. The company agrees to repay the principal amount according to the terms of issue and usually pays interest or another agreed return.

As per Section 2(30) of the Companies Act, 2013, debenture includes debenture stock, bonds, or any other instrument of a company that evidences a debt, whether it creates a charge on the assets of the company or not.

In simple words, a debenture holder is a lender to the company, not an owner. The holder earns interest or return as per the terms of issue, but does not get ownership or voting rights like an equity shareholder.

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Key Characteristics of Debentures

Feature	Meaning
Debt instrument	It represents borrowed money, not ownership capital
Fixed repayment terms	The company repays the amount as per the issue terms
Interest or return	The holder may receive fixed, floating, zero-coupon, or market-linked returns
No ownership rights	Debenture holders do not become shareholders
Balance sheet treatment	Debentures are recorded as borrowings or financial liabilities
Security may vary	Debentures may be secured or unsecured

Feature Debt instrument

Meaning It represents borrowed money, not ownership capital

Feature Fixed repayment terms

Meaning The company repays the amount as per the issue terms

Feature Interest or return

Meaning The holder may receive fixed, floating, zero-coupon, or market-linked returns

Feature No ownership rights

Meaning Debenture holders do not become shareholders

Feature Balance sheet treatment

Meaning Debentures are recorded as borrowings or financial liabilities

Feature Security may vary

Meaning Debentures may be secured or unsecured

Benefits of Debentures for Companies

Debentures help companies raise funds without giving up ownership. Since the company is borrowing money instead of issuing equity shares , existing shareholders do not lose control or voting power. This makes debentures useful for businesses that need capital but want to avoid ownership dilution.

They can also make financial planning easier. In the case of fixed coupon debentures, the company knows the interest amount in advance, which helps in budgeting and cash flow planning . Interest paid on debentures used for business purposes may also be deductible, subject to the conditions under the applicable income tax law. The Income-tax Act, 2025 came into force from 1 April 2026, replacing the Income-tax Act, 1961 for the applicable future framework, so the exact tax treatment should be checked under the current law.

Debentures are also flexible as a fundraising option . A company can issue them as secured, unsecured, convertible, non-convertible, redeemable, or zero-coupon instruments depending on its funding requirement and investor profile. For example, secured debentures may appeal to conservative investors, while convertible or market-linked debentures may attract investors looking for higher potential returns.

Types of Debentures

Debentures can be classified on different bases. The main classification is:

Basis of Classification	Types
By security	Secured debentures and unsecured debentures
By convertibility	Convertible and non-convertible debentures
By maturity	Redeemable and perpetual debentures
By coupon or return	Fixed coupon, floating coupon, zero-coupon, and market-linked debentures
By registration	Registered debentures and bearer debentures

Basis of Classification By security

Types Secured debentures and unsecured debentures

Basis of Classification By convertibility

Types Convertible and non-convertible debentures

Basis of Classification By maturity

Types Redeemable and perpetual debentures

Basis of Classification By coupon or return

Types Fixed coupon, floating coupon, zero-coupon, and market-linked debentures

Basis of Classification By registration

Types Registered debentures and bearer debentures

All Types of Debentures Explained

1. Secured Debentures

Secured debentures are backed by a charge on the company’s assets. The charge may be fixed on a specific asset, such as land or machinery, or floating on a group of assets, such as inventory or receivables . If the company defaults, secured debenture holders have a claim over the charged assets.

In practice, enforcement is usually carried out by the debenture trustee or through the applicable legal process, not casually by individual holders. For secured debentures, the charge created on company assets must be registered with the Registrar of Companies as required under Section 77 of the Companies Act, 2013.

2. Unsecured Debentures

Unsecured debentures are not backed by any specific asset of the company. The repayment depends mainly on the company’s creditworthiness and financial strength. Because the risk is higher, unsecured debentures generally carry a higher return than secured debentures. In case of liquidation, unsecured debenture holders do not have a specific claim over charged assets. They rank as unsecured creditors .

3. Registered Debentures

Registered debentures are issued in the name of the holder. The company records the debenture holder's name, address, and holding details in its register. Transfer of registered debentures requires proper documentation and registration. These are safer than bearer debentures because ownership records are maintained. Modern debenture issuances in India usually follow registered or dematerialised ownership records.

4. Bearer Debentures

Bearer debentures are debentures where ownership is transferred by physical delivery. The company does not maintain the holder’s name in the same way as registered debentures. In modern Indian practice, bearer debentures are mainly of historical and academic relevance. Current securities issuance and holding systems generally require proper ownership records, and listed securities are usually held in dematerialised form.

5. Convertible Debentures

Convertible debentures can be converted into equity shares of the issuing company. The conversion may happen on a fixed date or as per the terms of the issue. Under Section 71 of the Companies Act, 2013, a company may issue debentures with an option to convert them into shares, wholly or partly, at the time of redemption. However, this must be approved by a special resolution. Convertible debentures may carry a lower coupon because the investor also benefits from potential equity conversion. Convertible debentures are usually of two types:

Type	Meaning
Fully Convertible Debentures, or FCDs	The full debenture amount is converted into equity shares
Partly Convertible Debentures, or PCDs	Only part of the amount is converted into equity, and the remaining part continues as debt or is redeemed

6. Non-Convertible Debentures

Non-convertible debentures cannot be converted into equity shares. NCDs may be secured or unsecured, listed or unlisted, redeemable or perpetual, depending on the terms of issue. They are repaid in cash in accordance with the terms of issue. NCDs are common in Indian capital markets, especially among financial institutions and large companies. Listed NCDs are regulated under SEBI’s Issue and Listing of Non-Convertible Securities Regulations, 2021, which were amended up to January 21, 2026.

7. Redeemable Debentures

Redeemable debentures have a fixed repayment date. The company repays the principal amount either in one lump sum or in installments. This is the most common form of debenture because investors know when the principal will be repaid.

For example, a company issues ₹10,00,000 worth of 10% redeemable debentures for 5 years. The company pays annual interest and repays the principal at the end of the 5th year.

8. Perpetual or Irredeemable Debentures

Perpetual debentures do not have a fixed maturity date. The company may continue paying interest indefinitely and repay the principal only under specified conditions, such as winding up or a call option. These are rare in normal company accounting and are more relevant in specialised financial instruments. For general accounting students and small business readers, redeemable debentures are more important.

9. Zero-Coupon Debentures

Zero-coupon debentures do not pay regular interest. Instead, they are issued at a discount and redeemed at face value. In accounting, the discount or finance cost is recognised over the life of the debenture as per the applicable accounting standard.

For example, a company issues a debenture at ₹800 and redeems it at ₹1,000 after 5 years. The difference of ₹200 represents the return to the investor.

10. Market-Linked Debentures

Market-linked debentures are debt instruments where returns are linked to the performance of an index, security, or benchmark, such as the Nifty 50. Some MLDs may offer principal protection, while others may carry higher risk depending on the structure.

Investors should read the offer document carefully because the return is not the same as a fixed coupon debenture. In India, listed market-linked debt securities are covered under SEBI’s non-convertible securities framework. The SEBI NCS Regulations, 2021 have been amended up to January 21, 2026.

Type Fully Convertible Debentures, or FCDs

Meaning The full debenture amount is converted into equity shares

Type Partly Convertible Debentures, or PCDs

Meaning Only part of the amount is converted into equity, and the remaining part continues as debt or is redeemed

Master Comparison Table

Type of Debenture	Security	Convertibility	Maturity	Return Type	Investor Risk
Secured debenture	Backed by assets	May or may not be convertible	Usually fixed	Usually fixed	Lower
Unsecured debenture	No asset backing	May or may not be convertible	Usually fixed	Usually higher	Higher
Registered debenture	Holder details recorded	Depends on terms	Depends on terms	Depends on terms	Lower ownership risk
Bearer debenture	No registered holder record	Depends on terms	Depends on terms	Depends on terms	High
Fully convertible debenture	May be secured or unsecured	Fully convertible	Converts into equity	Usually lower coupon	Low to medium
Partly convertible debenture	May be secured or unsecured	Partly convertible	Part debt, part equity	Moderate	Medium
Non-convertible debenture	May be secured or unsecured	Not convertible	Redeemable or perpetual	Usually fixed	Medium
Redeemable debenture	May be secured or unsecured	Depends on terms	Fixed repayment date	Usually fixed	Low to medium
Perpetual debenture	May be secured or unsecured	Depends on terms	No fixed maturity	Usually fixed or floating	Medium to high
Zero-coupon debenture	May be secured or unsecured	Usually non-convertible	Fixed	Discount-based return	Varies
Market-linked debenture	May be secured or unsecured	Usually non-convertible	Fixed	Linked to market performance	Medium to high

Type of Debenture Secured debenture

Security Backed by assets

Convertibility May or may not be convertible

Maturity Usually fixed

Return Type Usually fixed

Investor Risk Lower

Type of Debenture Unsecured debenture

Security No asset backing

Convertibility May or may not be convertible

Maturity Usually fixed

Return Type Usually higher

Investor Risk Higher

Type of Debenture Registered debenture

Security Holder details recorded

Convertibility Depends on terms

Maturity Depends on terms

Return Type Depends on terms

Investor Risk Lower ownership risk

Type of Debenture Bearer debenture

Security No registered holder record

Convertibility Depends on terms

Maturity Depends on terms

Return Type Depends on terms

Investor Risk High

Type of Debenture Fully convertible debenture