Issue of Debentures

Last Updated On -17 Jul 2025

At some point in their growth, every business needs money from outside sources to grow, run its business, or refinance. Equity is a frequent way to raise money, but corporations often choose debentures instead since they don't want to lose ownership. Debentures let corporations get money while giving investors a set amount of money back. This blog will explain what debentures are, the several kinds of them, how they work, and why they are important in corporate finance.

What is a Debenture?

A debenture is a written document that shows that a corporation owes money and is signed by the firm. It says that the company will pay back the principle plus interest at a set rate and time. Debentures are basically loans, so the person who has them is a lender, not a shareholder.

A debenture is a loan that a firm takes from the public with the promise to pay it back with interest.

What Does the Issue of Debentures Mean?

The practice of offering and giving out debentures to the public, banks, or current shareholders to raise long-term capital is called "issuing debentures." It means giving out a document that lists the repayment time, interest rate (also called coupon rate), terms of redemption, and security (if there is any).

Companies issue debentures for a number of reasons:

To get long-term money without giving up ownership.
To pay for undertakings that need a lot of money, like building infrastructure or buying machinery.
To pay off or restructure debt that is already too expensive.
To keep the best capital structure.

Key Types of Debentures

Issuing debentures means you have to pay interest even if you don't make any money. Before issuing, companies need to check how well they can handle cash flow to prevent falling into debt traps and default risk. Interest on debentures is required, unlike dividends, which makes them a fixed cost.

There are a few different ways to group debentures:

Based on safety: Secured Debentures: backed by the company's assets. Unsecured (Naked) Debentures, these don't have any assets backing them up, hence they are riskier.
Based on how easily they can be changed: Convertible Debentures, after a certain amount of time, they can be changed into equity shares. Non-convertible Debentures (NCDs) can't be turned into stock.
Based on Redemption: Redeemable Debentures, paid back after a set amount of time. Irredeemable (Forever) Debentures, not paid back while the company is still in business; not very common in modern finance.
Based on Registration: Registered Debentures, the corporation keeps track of who owns them. Bearer Debentures, not registered and can be transferred by delivery.

Key Ways to Issue Debentures

Debenture investors can't vote on company decisions, but they do have first dibs on assets if the company goes out of business.

There are several ways for a business to issue debentures:

Issue at Par: Debentures are sold for their full value. For instance, a ₹1,000 debenture is offered for ₹1,000.
Issue at a Discount: Debentures are sold for less than their face value (for example, a ₹1,000 face value debenture is sold for ₹950). The discount is seen as a loss and is spread out over time.
Issue at a Premium: Debentures are sold for more than their face value (for example, ₹1,000 sold for ₹1,050). The corporation puts the premium it gets into its securities premium reserve.
Give as Collateral Security: Sometimes, debentures are given out as a second kind of security for a loan or borrowing to make sure it is paid back. The balance sheet shows these as a note.
Private Placement: Only certain investors, like banks or other financial institutions, can get them.

How to Issue Debentures?

The company's board of directors must approve the issuance of debentures.
Trust Deed: A Debenture Trust Deed is signed by the corporation and a Debenture Trustee.
Appointing a Trustee: A Debenture Trustee must be chosen for public matters.
For a public issuance, a prospectus or offer letter is sent out.
Allotment: Applicants are given debentures.
Listing: If necessary, debentures can be listed on stock markets.
Redemption Schedule: The corporation needs to make it clear when the principal will be paid back.

Accounting Treatment for Issue of Debentures

Issuing debentures is a smart way for firms to get money without giving up control. They have fixed payback terms, but they are flexible and attractive to both investors and issuers. Debentures are an important aspect of long-term funding strategies in today's business world, whether you're studying for commerce exams or trying to grasp corporate finance.

Issue of Debentures at Par

Bank A/c Dr.

To Debentures A/c

(Being debentures issued at par)

Issue of Debentures at Discount

Bank A/c Dr.

Discount on Issue A/c Dr.

To Debentures A/c

(Being debentures issued at discount)

Did you know?

To pay for the purchase of Jaguar-Land Rover in 2008, Tata Motors sold convertible debentures. The debentures later helped lower equity dilution since they were partially redeemed and converted. This shows how flexible debentures can be in business finance.

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Frequently Asked Questions (FAQs)

Who is allowed to issue debentures?

Debentures can only be issued by corporations, whether they are private or public limited. Partnerships and sole proprietorships can't issue them because they aren't separate legal entities.

Are debentures safe for people who invest?

Secured debentures are pretty safe, especially when they are backed by large firms. But investors should always look at the credit score and repayment terms before putting money into something.

What makes debentures distinct from stocks?

Debentures are a loan to the corporation that pays a fixed interest rate. Shares give you ownership and pay dividends, but these are not fixed or guaranteed.