Debt capital
Also written Borrowed capital · Loan capital
Money a company borrows — through debentures, bonds, commercial paper or bank loans — which must pay interest and be repaid on maturity, whether or not the company is doing well.
In plain language
Debt capital is what a company raises by borrowing rather than by selling ownership. The people who supply it are lenders or creditors — individuals, or institutions including banks.
The bargain is the opposite of equity. The lender gets no vote and no share of the upside. In return the lender gets a promise: interest at stated intervals, and the principal back on a stated date. For the company that promise is an obligation that does not go away in a bad year.
That is why, for an investor, debt means regular return and security, and for the company it means a fixed cost that has to be met before the shareholders see anything.
How it works
How it is raised. Either by issuing securities — debentures, bonds, commercial papers — or by taking a loan from a bank or financial institution. In Indian usage the borrowing of a government or public sector organisation is a bond, and that of the private corporate sector a debenture; the words are used interchangeably.
For how long. Debt is raised for a fixed period. The workbook splits it into short-term (less than one year) and long-term (more than one year, going up to 30 years or more).
At what cost. The coupon a borrower pays depends on its risk of default — which is why a credit rating by a SEBI-registered credit rating agency matters.
With what rights. A secured loan gives lenders a right against the company's assets if interest or principal is not paid; an unsecured loan does not. Debt instruments may be listed on a stock exchange.
The workbook lists what defines each form:
| A bond or debenture | A bank or FI loan |
|---|---|
| Face value | Amount of the loan |
| Coupon rate and frequency of interest | Interest rate and frequency of payment |
| Date of maturity / redemption | Nature — term loan, overdraft limit, bill discounting |
| Other rights — secured / unsecured | Repayment conditions and timeline, as negotiated |
| Other rights — secured / unsecured |
Two more contrasts from Chapter 2.7: a debenture holder is a creditor, not a shareholder; and debenture interest is an expense paid before calculating taxable profit, whereas preference dividends come out of residual profits after tax.
A worked example
Illustrative figures. A company funds a Rs 100 crore expansion with Rs 40 crore of equity and Rs 60 crore of five-year secured NCDs at 9 percent, interest payable annually.
Annual interest = Rs 60 crore × 9% = Rs 5.40 crore
| Good year | Bad year | |
|---|---|---|
| Operating profit before interest | Rs 22.0 crore | Rs 6.0 crore |
| Interest to NCD holders | Rs 5.4 crore | Rs 5.4 crore |
| Left before tax, for shareholders | Rs 16.6 crore | Rs 0.6 crore |
The lenders' Rs 5.40 crore does not move. The shareholders absorb the whole swing.
In year five the company must also repay Rs 60 crore of principal. If it cannot, the NCDs being secured gives the holders a right against the charged assets — a right shareholders never have.
Contrast a Rs 25 crore overdraft limit from a bank for working capital: same family of capital, but short-term, with repayment conditions negotiated with the bank rather than printed on a certificate.
Why NISM asks about it
Chapter 1.1 and 1.3 (Features of Debt Capital) set out contributors, tenor, cost and rights; Chapter 3 then builds the debt securities on top. The Chapter 1 sample questions are direct: "Debt capital is always raised for short-term periods" (false), and "the interest a company will have to pay on the debt raised will depend upon its ________" (default risk).
Common exam traps
- Debt is not always short-term. Short-term is under one year; long-term runs beyond one year and up to 30 years or more.
- The coupon depends on default risk, not on market risk or liquidity risk — hence the role of credit ratings.
- Debt holders are creditors, not owners. They have no voting rights and no claim on residual profit.
- Secured is not the same as rated. Security is a right against assets; a rating is an opinion on the likelihood of timely servicing.
- Bond and debenture are used interchangeably in India, though the workbook ties 'bond' to government and public sector borrowers and 'debenture' to the private corporate sector.
- Debt holders rank ahead of equity in winding up — and interest is paid before tax, while dividends are paid after it.
Where this is taught
- Series II-A · Chapter 1: Introduction to Securitiesintroduced here
- Series II-B · Chapter 1: Introduction to Securitiesintroduced here
Related terms
- Credit ratingAn opinion on how likely a borrower is to service an instrument on time, reduced to a symbol by a SEBI-registered rating agency — and reviewed continuously, not fixed for the life of the bond.
- Credit riskThe risk that a borrower fails to meet its obligations on a debt instrument — the risk credit rating agencies exist to grade, and the one that triggers a segregated portfolio in a mutual fund.
- Convertible debenturesDebentures that turn into equity shares on terms fixed at issue — the investor draws a coupon until conversion, and the company settles the debt in shares instead of cash.
- Equity capitalMoney put into a company by its owners — promoters and shareholders — in return for ownership, votes and a claim on residual profits. It is never repaid and ranks last in a winding up.
- Coupon rateThe rate of interest a bond pays, applied to its face value and never to its market price — which is why the coupon tells you the cash flow but not the return.
- Money Market InstrumentsDebt instruments with maturity of one year or less. Under the PM Regulations they include commercial paper, trade bills, treasury bills, certificates of deposit and usance bills.
- Floating rate bondA bond whose coupon is not fixed but reset at intervals against a benchmark rate plus a stated mark-up — so the interest paid moves with market rates over the life of the bond.
- Foreign Currency Convertible BondA bond issued by an Indian company to investors in foreign currency, paying interest and principal in that currency and convertible into ordinary shares at a price usually set above the market price.
- Hybrid instrumentA security that combines features of both debt and equity in one instrument — the workbook's two examples are convertible debentures and preference shares.