Debenture

In everyday English, bond and debenture are often used as if they mean the same thing. The XXI-A workbook draws a sharper line, specific to India. Long-term debt securities issued by the Government of India, a State Government, or an entity owned by them or by development financial institutions are called bonds. Instruments issued by other entities — companies, banks, financial institutions — are called debentures.

So a debenture is a company's IOU: a promise to pay a fixed coupon and return the face value at maturity, exactly like a bond in its mechanics, but issued by a corporate rather than a sovereign or quasi-sovereign body.

Where debentures sit in the market (Chapter 4, Table 4.1). The workbook classifies India's fixed income market by issuer: Government Securities (Central and State Governments), Public Sector Bonds (government agencies, statutory bodies, PSUs) and Private Sector Bonds, issued by corporates, banks and financial institutions. Debentures are this private sector segment's instruments.

Mostly issued privately. The Indian primary market in corporate debt is, in the workbook's words, basically a private placement market, with most corporate bond and debenture issues privately placed among wholesale investors — banks, financial institutions, mutual funds and other large investors. This has restricted retail participation, which the workbook says remains very small.

Secured or unsecured. A debenture can be secured against specified property of the issuer, in which case the value of that security decides its quality, or it can be unsecured and backed only by the issuer's promise, in which case the issuer's own creditworthiness decides its quality.

Governed by an indenture. A debenture's terms — its face value, coupon rate, maturity, collateral and covenants — are set out in an indenture, the legal agreement between the issuer and the debenture holders.

Sundaram Infra Finance Ltd, a non-banking financial company, issues a ₹1,000 face value, 9.5% coupon, 5-year debenture, secured against a pool of its receivables. Vikram, a retail investor, buys 200 of these debentures through his PMS account for ₹2,00,000.

Because Sundaram Infra is a company, not the Government of India or a State Government, the workbook's terminology calls this instrument a debenture, not a bond, even though its mechanics — fixed coupon, fixed maturity, face value redemption — are identical to a government security. If Vikram's PMS instead held a 10-year paper issued by the Government of India at 7.2%, that instrument would be called a bond under the same terminology, purely because of who issued it.

Because Vikram's debenture is secured, if Sundaram Infra defaults, debenture holders have a claim on that specific collateral ahead of the company's unsecured creditors. An unsecured debenture would instead leave Vikram as a general creditor, relying only on Sundaram Infra's overall creditworthiness.

Chapter 4 (Investing in Fixed Income Securities), footnote 4 to section 4.1, states the bond-versus-debenture distinction that the whole chapter's terminology depends on. Expect a definitional question on which issuers' instruments are called debentures, and a question distinguishing secured from unsecured debentures by what decides their quality.

• The bond/debenture split is about the issuer, not the instrument's features. A government-linked issuer's paper is a bond; a corporate issuer's identical-looking paper is a debenture.
• Most Indian corporate debentures are privately placed, not publicly issued — retail participation is small, per the workbook.
• Secured debentures are valued by their collateral; unsecured debentures are valued by the issuer's creditworthiness. Do not assume every debenture is secured.
• Do not confuse a plain debenture with a Market Linked Debenture or a convertible debenture — the base word covers the whole family, but a PMS portfolio can hold structured variants with very different risk.