In simple words, debentures means a document containing an acknowledgement of indebtedness issued by a company and giving an undertaking to repay the debt at a specified date or at the option of the company and in meantime to pay the interest at a fixed rate and at the intervals stated in the debenture.

The above description of debentures indicates the following characteristic features of debentures.

1.    Investors who invest in the debentures of the company are not the owners of the company. They are creditors of the company or in other words, the company borrows the money from them.

2.    Funds raised by the company by way of debentures are required to be repaid during the lifetime of the company at the time stipulated by the company. As such, debentures are not a source of permanent capital. Debentures can be considered to be a long term source.

3.    In practical circumstances, debentures are generally secured i.e. the company offers some to the assets as security to the investors in debentures.

4.    Return paid by the company is in the form of interest. Rate of interest is predetermined, but the same can be freely decided by the company. The interest on debenture is payable even if the company does not earn the profits.

5.    Debentures as a source of raising long term funds are very risky from company’s point of view. The risk accepted by the company in case of debentures is two fold. First, to pay interest at the predefined rate and at predefined time intervals irrespective of non-availability of profits and second, to repay the principal amount of debentures during the life time of the company.

6.    Risk on the part of investors is very less in case of debentures. The investors in debentures being the creditors of the company, they can not control the affairs of the company. As such, the debentures do not carry any voting rights. However, in the event of non-payment of interest or principle amount they can interfere the in the operations of the company by taking legal action.