A Debenture is a debt security issued by a company that offers to pay interest instead of the money borrowed for a specific period. In essence, it represents a loan taken by the issuer who pays an agreed rate of interest during the lifetime of the instrument and repays the principal typically, unless otherwise agreed, on maturity.
Debentures are long-term debt instruments issued by private sector companies. These are issued in varying denominations like Rs 1,000, Rs 10,000, Rs 1Lakh, or even higher. The maturity period of the debentures could be from one year to ten years and, in some cases, even longer. However, long maturity debentures are rarely issued, as investors are uncomfortable with such maturities.
Debentures enable investors to reap the dual benefits of good corporate credibility and high returns. Debentures earlier were issued in physical form. However, with the dematerialization of securities, issuers like Corporates and Public Sector Units (PSUs) have been issuing debentures in Demat form.