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The Rise of Debentures: Investors New Financial Instrument

A debenture is a type of long-term debt instrument issued by corporations or governments to raise funds for various purposes, such as expansion, acquisitions, or infrastructure projects. Unlike bonds, debentures are typically unsecured, meaning they are not backed by specific assets. Instead, they rely on the general creditworthiness and financial stability of the issuer. 

However, some debentures may be secured by specific assets or have specific collateral arrangements, providing additional security to the investors. Debentures are usually issued with fixed interest rates, but they can also have floating rates that are linked to market benchmarks. The interest payments are made periodically, typically semi-annually or annually, throughout the debenture's tenure.

Change in Tides Toward Debentures

In the ever-evolving world of investment opportunities, debentures have emerged as a popular and attractive financial instrument for both issuers and investors. Debentures offer a unique combination of stability, fixed income, and potential returns, making them a rising stars in the world of investments. In recent times, as the equity and real estate markets have been unstable, investors have embraced debentures more and more as a tool to generate a better returns.

What are Convertible and Non-convertible Debentures?

a.       Convertible Debentures: Convertible debentures are a type of debenture that gives investors the option to convert their debentures into equity shares of the issuing company within a specified period at a specified conversion price or ratio. This feature provides investors with the potential to benefit from the company's stock if its value increases.

b.       Non-convertible Debentures: The Non-convertible debentures, as the name suggests, do not offer the option of conversion into equity shares. These debentures have a fixed maturity date, and investors receive regular interest payments throughout the tenor of the debenture. At maturity, the issuer repays the principal amount to the debenture holders. Non-convertible debentures are typically used by companies for raising long-term debt capital without diluting their ownership.

How Debenture Differs from Bonds?

Bonds are typically issued by governments or government entities, while debentures are issued by corporations or private entities. Bonds are often secured by specific assets or collateral, providing investors with a higher level of security in the event of default. Debentures, on the other hand, are usually unsecured, means they are not backed by specific assets.

Instead, debenture holders rely on the general creditworthiness and financial stability of the issuer. In the event of issuer bankruptcy or liquidation, bondholders have a higher priority in receiving repayment from the assets of the issuer. Debenture holders have a lower priority and are considered unsecured creditors. In terms of the interest payments, bonds often have fixed interest rates, while debentures can have fixed or floating interest rates.

Who is a Debenture Trustee?

Debenture trustee is a SEBI registered entity who safeguards the interest of debenture holders and serves as a liaison between the issuer company and the debenture holders. Debenture Trustee holds the security in Trust for the benefit of Debenture Holders and enforce them in case of any eventuality.

In Indian laws, the concept of a debenture trustee was introduced for the first time in the SEBI (Debenture Trustees) Regulations, 1993 ("Regulations"), which inter alia govern the eligibility criteria for registration with SEBI, code of conduct and other regulations to monitor and review the working of debenture trustees.

Duties of the Debenture Trustee include:

a)   Conduct the Due Diligence and issue certification as per SEBI regulations

b)   Call for periodical reports from the body corporate, i.e., issuer of debentures to monitor the security & Covenants

c)   Take possession of trust property in accordance with the provisions of the trust deed

d)    Enforce security in the interest of the debenture holders.

e)     Ensure the compliances as per the Regulations

The appointment of the Debenture Trustee by the issuer company has to be done carefully, mainly because as this role serves as a continual source of assurance to the Debenture Holders. It instils in them a sense of confidence and trust over the issuer company. With such an important role to play for the debenture trustee in NCD issue, SEBI is looking to strengthen the regulatory framework for them in view of better investor protection and reducing the events of defaults.

Axis Trustee Services Limited is one of such service providers which corporates can reach out to for any requirement of Corporate Trustee Services.

Future Outlook on the Debenture Market

The Indian corporate bond and debenture market is going to register an upward trend in its growth trajectory. The boom in Indian infrastructure development and the rise in retail investors will accelerate the growth even further. Debentures offer investors the opportunity to diversify their investment portfolios and manage risk effectively. By investing in a range of debentures across different issuers, sectors, and credit ratings, investors can spread their risk and reduce exposure to any single investment.

Top Tips

The rise of debentures as a new financial instrument reflects the changing investment landscape and the evolving needs of investors. With their stability, fixed income, attractive returns, and flexibility, debentures have captured the attention of investors seeking reliable investment options. 

As regulatory frameworks ensure transparency and investor protection, debentures are poised to continue their upward trajectory, offering investors a valuable addition to their investment portfolios. Our Axis Debenture Trustee is appointed under a trust deed for securing / handling any issue of debentures of a body corporate. In India, Debenture Trustees are regulated under SEBI (Debenture Trustees) Regulations, 1993.