Raising funds is a critical part of any business's growth strategy, and debentures offer a reliable method for obtaining long-term financing. A debenture is a debt instrument that companies use to borrow money, secured or unsecured, with an agreement to pay interest and return the principal amount at maturity.

This guide by CA Manish Mishra explains how to raise funds via debentures, covering the types, processes, benefits, risks, and regulatory requirements.

What Are Debentures?

Debentures are financial instruments issued by companies to raise debt capital. They are typically issued with a fixed interest rate and a maturity date. Unlike equity, debentures do not dilute ownership.

Types of Debentures

- Secured Debentures:

• Backed by company assets as collateral.
• Lower risk for investors.

- Unsecured Debentures:

• Not backed by assets, relying solely on the issuer’s creditworthiness.
• Higher risk for investors.

- Convertible Debentures:

• Can be converted into equity shares at a future date.
• Attractive to investors seeking potential equity upside.

-Non-Convertible Debentures (NCDs):

• Cannot be converted into equity.
• Offer higher interest rates.

- Redeemable and Irredeemable Debentures:

• Redeemable: Repaid on maturity.
• Irredeemable: No fixed maturity date; repayment depends on issuer’s discretion.

Steps to Raise Funds via Debentures

-  Assess the Need for Funding

• Define the purpose: Expansion, working capital, debt refinancing, or other strategic needs.
• Determine the amount of capital required.

- Choose the Type of Debenture

• Decide whether to issue secured or unsecured, convertible or non-convertible debentures, based on your financial strategy and market demand.

- Prepare a Business Plan

• Include details on the company’s financial health, revenue projections, and repayment capacity
• Highlight why the investment is safe and beneficial for potential investors.

 Comply with Regulatory Requirements

In India, the process is governed by the Companies Act, 2013, and the Securities and Exchange Board of India (SEBI) for listed entities.

- Key requirements include:

• Approval from the company’s Board of Directors and shareholders.

• Appointment of a debenture trustee for secured debentures.

• Filing relevant forms (e.g., MGT-14 for Board Resolutions).

- Structure the Debenture Issue

• Decide on the interest rate, tenure, and repayment terms.
• Make sure the terms are competitive to attract investors while balancing your repayment capacity.

- Draft the Offer Document

The offer document or prospectus should include details of:

• Purpose of the issue.
• Company’s financial position.
• Risk factors.
• Terms of the debenture issue.

- Market the Debenture Issue

• Reach out to potential investors through private placements or public offerings.
• Leverage investment bankers, brokers, and digital platforms for wider reach.

- Allot Debentures and Receive Funds

• Allocate debentures to investors as per the subscription.

Make sure funds are deposited in a designated bank account.

- Maintain Compliance Post-Issue

File returns with the Registrar of Companies (RoC).

Regularly update debenture holders on interest payments and financial performance.

Adhere to reporting obligations under SEBI and other regulatory authorities.

Benefits of Raising Funds via Debentures

- Cost-Effective Financing

Lower cost of capital compared to equity, as interest payments are tax-deductible.

- Retains Ownership

Debentures are a form of debt, so issuing them does not dilute the ownership of existing shareholders.

- Fixed Interest Payments

Provides predictability in financial planning for both issuer and investors.

- Attracts Risk-Averse Investors

Secure debentures appeal to conservative investors looking for stable returns.

- Flexible Options

Variety of debentures allows companies to choose terms that align with their financial strategy.

Risks and Challenges

- Interest Rate Obligations

Fixed interest payments can become a burden during periods of low revenue or profit.

- Regulatory Compliance

Non-compliance with regulations can lead to penalties and damage to reputation.

- Credit Risk

Issuers with weak credit ratings may struggle to attract investors or need to offer higher interest rates.

- Asset Encumbrance

Secured debentures require assets as collateral, which may limit future financing options.

Regulatory Framework in India

- Companies Act, 2013

Governs the issuance of debentures, including conditions for secured and unsecured debentures.

- SEBI Regulations

Applicable to listed companies issuing non-convertible debentures.

Mandates credit rating, appointment of a debenture trustee, and periodic disclosures.

- Debenture Trustees

Required for secured debentures to protect the interests of debenture holders.

Trustees oversee compliance and Make sure repayment of principal and interest.

Key Considerations for Investors

- Credit Rating:

Higher-rated debentures indicate lower risk.

- Interest Rates:

Compare with market rates to make sure competitive returns.

- Maturity Period:

Match investment horizon with debenture tenure.

- Repayment Terms:

Understand redemption features, including callable or puttable options.

- Issuer’s Financial Health:

Evaluate the issuer’s ability to meet interest and principal repayment obligations.

GenZCFO Advice

Raising funds via debentures is an effective financing method for businesses seeking long-term capital without diluting ownership. We at GenZCFO help you by carefully structuring the issue, complying with regulatory requirements, and maintaining transparency with investors, companies can successfully leverage this financial instrument to fuel growth. While there are risks involved, they can be mitigated through sound financial planning and adherence to best practices. For investors, debentures offer a stable and predictable return, making them an attractive option in today’s dynamic financial market. 

Feel free to contact us in case of any queries.