83. Debenture

Section 2(12) of the Companies Act, 1956 defines Debenture as “Debenture includes Debenture stock, bonds and any other securities of a Company whether constituting a charge on the assets of the Company or not”. Debenture is a certificate issued by a Company indicates the debt owed by the Company. Like shares, Debenture is an investment in a Company. But, shares and Debentures are different as follows.
Comparison of Debentures and shares
1	Debenture is a loan; hence, Debenture holder is a creditor of the Company. Shareholder is a member.
2	Debentures can be redeemed. Equity shares cannot be paid back(Now it is possible to buy back shares, but only through a process)
3.	Debenture holders being creditors get priority in payment then shareholders during winding up.
4.	Debenture holder has no voting rights (Section 117) Shareholders have voting rights.
5.	Debenture holder is entitled to a fixed rate of interest. Shareholders have no such returns from investment. They are eligible for dividend only when the Company declares it.
Private Companies cannot issue un secured Debentures.
Debentures may secured or un secured. Companies Act, 1956 does not speak anywhere that a Private Company cannot issue un secured Debentures. But indirectly it prevents Private Companies from issuing un secured Debentures. According to Companies (Acceptance of Deposit rules) Unsecured Debentures will be treated as deposits. Section 3 (iii) prevents a Private Limited Company from accepting deposits from persons other than its members, directors and their relatives. So, a Private Company cannot issue unsecured Debentures.
Other formalities in the issue of debentures
1.		Debenture trustee should be appointed.(As per Section 117A, it is mandatory)
2.		Debenture Redemption reserve should be created by the Company.(mandatory as per Section 117C)
3.		Charge should be created with Registrar of Companies.
4.		While issuing secured Debentures, certificate from bankers that the assets are free from encumbrances (if already encumbered, no objection certificate) should be obtained.
5.		Necessary security must be created within six months.
6.		Utilization of the funds should only after creating the Security.
7.		In order to reduce one time financial burden, the Company may spread the redemption.
8.		Debenture certificate should be created within15 days of creation of Charge with Registrar of Companies.
9.		Company has to maintain a Register of debenture holders.