Types of Debentures: A Complete Guide for Indian Investors
Debentures are a key fixed-income instrument for investors seeking regular income and portfolio diversification beyond equity. Get expert SEBI-registered guidance from Novelty Wealth on secured, unsecured, convertible, and non-convertible debentures.
What Is a Debenture?
A debenture is a medium-to-long-term debt instrument issued by a company to raise capital from the public. When a company issues a debenture, it is essentially borrowing money from investors and agreeing to pay a fixed rate of interest (coupon) over a defined tenure, after which the principal is repaid.
Unlike equity shares, debentures do not give the holder any ownership rights in the company. Debenture holders are creditors of the company, not shareholders. This makes debentures a fixed-income investment, typically offering more predictable returns than equity but with lower growth potential.
For Indian HNI and affluent investors looking to diversify beyond mutual funds, stocks and debentures, especially Non-Convertible Debentures (NCDs), are a key fixed-income instrument for generating regular coupon income.
Types of Debentures in India
Debentures in India are classified along three primary dimensions: security, convertibility, and redemption. Here is a complete breakdown:
1. Based on Security: Secured vs Unsecured Debentures
| Parameter | Secured Debentures | Unsecured Debentures |
| Backing | Backed by company's assets | No specific asset backing |
| Risk to investor | Lower — asset charge exists | Higher — unsecured creditor |
| Interest rate (coupon) | Typically lower | Typically higher (risk premium) |
| Legal recourse on default | Can claim secured assets | General creditor claim |
| Common example | Most listed NCDs in India | Some corporate bonds |
2. Based on Convertibility: Convertible vs Non-Convertible Debentures
| Parameter | Convertible Debentures (CD) | Non-Convertible Debentures (NCD) |
| Can convert to equity? | Yes — at a defined ratio/price | No — always redeemed as debt |
| Return type | Coupon + equity upside potential | Fixed coupon income only |
| Risk profile | Moderate — equity conversion risk | Lower — pure fixed income |
| Liquidity | Limited secondary market | Listed NCDs are exchange-traded |
| Best for | Growth + income blend | Regular fixed income investors |
Read More on Tax on NCD interest
Non-convertible debentures (NCDs) are the most commonly issued debenture type in India, used by NBFCs (like Muthoot Finance, Shriram Finance) and large corporates to raise retail debt capital. Listed NCDs are traded on BSE/NSE and can be bought/sold through a demat account.
3. Based on Redemption: Redeemable vs Irredeemable Debentures
Redeemable debentures have a fixed maturity date. The principal is returned to the investor on the due date. These are the most common type in India. Irredeemable (perpetual) debentures have no fixed maturity and are extremely rare in Indian markets as most listed debentures are redeemable.
Difference Between Debenture and Debenture Stock
A debenture is a loan instrument: the company borrows a fixed amount and promises to repay it with interest.
A debenture stock (also called loan stock) is a form of stock that pays a fixed dividend-like interest but is not redeemable, the company does not repay the principal. Debenture stocks are a relic of older corporate structures and are rarely issued in modern Indian capital markets.
Investing in Debentures: What to Evaluate
Before investing in any debenture or NCD, evaluate these four factors:
- Credit rating: Look for AAA or AA+ ratings from CRISIL, ICRA, or CARE. Lower-rated NCDs offer higher coupons but carry significant default risk.
- Issuer quality: Understand the company's debt-to-equity ratio, cash flows, and track record of NCD repayments. NBFCs and housing finance companies are the most common NCD issuers.
- Coupon vs post-tax return: NCD interest is fully taxable at your income slab rate. For 30% bracket investors, a 10% coupon NCD yields approximately 7% post-tax.
- Liquidity: While listed NCDs are exchange-traded, bid-ask spreads can be wide for smaller issues. Ensure you can hold to maturity if needed.
NW Pro subscribers get access to Novelty Wealth's curated fixed-income research and personalised NCD portfolio recommendations, matched to your income, tax bracket, and liquidity needs.
Frequently Asked Questions
Debentures in India are classified by security (secured vs unsecured), convertibility (convertible vs non-convertible), and redemption (redeemable vs irredeemable). The most common type for retail investors is listed Non-Convertible Debentures (NCDs) — which are secured, redeemable, and exchange-traded.
Secured debentures are backed by a charge on the company's assets — giving investors a claim on those assets in case of default. Unsecured debentures have no asset backing and carry higher risk, typically compensated with a higher coupon rate.
An NCD is a debenture that cannot be converted into equity shares. It pays a fixed coupon rate over its tenure and returns the principal on maturity. NCDs are commonly issued by NBFCs in India and traded on BSE/NSE for liquidity.
Safety depends on the credit rating and issuer quality. AAA-rated secured NCDs from established companies are considered relatively safe fixed-income investments. Lower-rated or unsecured debentures carry higher default risk. Always check CRISIL/ICRA rating before investing.
Interest from NCDs is fully taxable as 'income from other sources' at your applicable income tax slab rate. If you sell an NCD before maturity on an exchange, capital gains tax applies — STCG at slab rate (under 12 months), LTCG at 12.5% above ₹1.25L.