1. The Basics: What a Debenture Is, and Why It's Used

A debenture is a document acknowledging a debt — the company borrows money and promises to repay it, usually with interest, on agreed terms. Unlike shares, a debenture holder is a creditor, not an owner: no voting rights, no dividend, no dilution of the promoters' shareholding. That's precisely why debentures are a popular way for closely-held companies to raise money without giving up control.

The framework sits primarily under the Companies Act, 2013: Section 71 (Debentures), Section 42 (the private placement mechanism through which debentures are actually offered), and the Rules made thereunder.

2. The Three Basic Flavours: NCD, OCD, and CCD

NCD (Non-Convertible): Never converted, always redeemed in cash. Pure debt. Needs security (or listing) to avoid being classified as a "deposit." DRR required (unless the issuer falls in an exempt category). Typical use: plain-vanilla lending, promoter/family financing.

OCD (Optionally Convertible): Holder's choice — may convert or take cash. Hybrid, but treated as debt because cash repayment remains possible. Same deposit rules as NCD — optionality defeats the "compulsory conversion" exemption, so security is still needed. DRR required. Typical use: structured debt with built-in flexibility for the investor.

CCD (Compulsorily Convertible): Mandatory conversion into equity, no cash-out option. Deferred equity, debt only until conversion. Exempt on its own from deposit rules, provided conversion is mandatory within 10 years, no security needed for this purpose. Not triggered for DRR in the same way, since no cash redemption event ever occurs. Typical use: growth-capital and investor rounds where the investor intends to become a shareholder but wants a fixed conversion mechanism upfront.

It is to be noted that an OCD, despite "feeling" closer to a CCD commercially, is treated exactly like a plain NCD because the Deposit Rules exemption is worded around conversion being compulsory — an instrument where the holder merely has the option to convert does not qualify.

One point worth flagging: the 10-year cap on the exemption route is a Deposit Rules requirement, not just a commercial convention. If the conversion trigger is drafted to fall beyond 10 years, the exemption doesn't apply, and the instrument needs to be secured instead. Similarly, the conversion price or formula should be fixed or objectively determinable at issuance.

3. There Is Only One Door: Private Placement

A private company is barred from making a public offer of any security — shares, debentures, anything (Section 23). The only way it can bring in outside debenture-holders is through private placement under Section 42.

In practical terms:

  • No more than 200 persons per financial year for that class of security.
  • The company sends a formal offer letter (Form PAS-4) to identified persons only — no advertising, no general solicitation.
  • Money must come in through a bank, not cash, and sits in a separate bank account until allotment happens.
  • Allot within 60 days of receipt; failing that, refund within 15 days; failing that, 12% p.a. interest accrues, and the money risks being treated as an unlawful deposit.
  • Return of allotment (PAS-3) within 15 days of allotment.
  • The offer requires a special resolution.

4. Secured or Unsecured — Why Unsecured, Unlisted Debentures Aren't a Real Option

The Companies Act draws a hard line around what companies are allowed to borrow informally. Anything a company receives that isn't share capital, and doesn't fall into a specific carve-out, is treated as a "deposit," and deposits are tightly restricted. A private company can generally only accept deposits from its own members, and even then only by satisfying a fairly heavy set of conditions.

The Deposit Rules carve out three categories of debenture that escape being treated as a "deposit":

  • Secured debentures: backed by a first (or equally-ranking) charge on the company's assets, capped at the value of those assets as certified by a registered valuer.
  • Compulsorily convertible debentures (CCDs): instruments that must convert into shares within 10 years.
  • Unsecured NCDs that are Listed on a recognised stock exchange.

A plain, unsecured NCD or OCD, privately placed, with no listing, fits none of these three baskets. It is, by elimination, a deposit, no matter how the parties intended to characterise it. That triggers deposit-acceptance restrictions and exposes both the company and its directors to liability under Section 76A.

The practical upshot: listing debt on an exchange is rarely realistic for a private company, and compulsory conversion changes the commercial nature of the instrument into something closer to equity — appropriate for an investor round, but not for a company simply looking to borrow money and repay it. That leaves security as the only workable path for a private company that wants to raise genuine, repayable debt through debentures.

5. Debenture Trustee Becomes Mandatory the Moment You Go Secured

Once the company issues secured debentures, appointing a SEBI-registered debenture trustee is mandatory (Rule 18(1)(c)), because a charge is a single, indivisible interest, and it isn't practical to create it separately in favour of each of potentially dozens of holders who may change over time. The trustee holds the security on trust for the entire class of holders and is the single point of enforcement if things go wrong.

  • Trustee must be appointed before the offer is made.
  • Trust deed (Form SH-12) executed within 60 days of allotment; the charge is separately registered with the ROC.
  • Redemption period: capped at 10 years, extendable to 30 years for infrastructure companies.
  • Charge must cover assets sufficient to repay principal and interest in full.

6. The Full Set of Conditions for Secured Debentures (Rule 18)

  • Redemption period capped at 10 years.
  • The charge must cover assets of the company (or its subsidiary/holding/associate) sufficient to repay principal and interest in full.
  • Trust deed and charge registration timelines as set out above.

7. Debenture Redemption Reserve (DRR)

For a private company issuing debentures via private placement, DRR of 10% of the value of outstanding debentures is required. Listed companies, banks, AIFs, and RBI-registered NBFCs are exempt — however a private company issuer is not.

8. Internal Approvals

The board must authorise the issuance, and a special resolution of shareholders is required for the private placement offer. The board also authorises execution of the trust deed, creation of the charge, and appointment of the debenture trustee.