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What are Non Redeemable Debentures?

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Non Redeemable Debentures

The word ‘redeem’ means to buy back. Thus Non Redeemable Debentures is a reference to a type of debentures that will continue to remain alive in perpetuity. For this reason, such debentures are also called ‘perpetual’ or ‘Irredeemable’ debentures. The issuing company does not have any liability to redeem such debentures as long as it is a going concern.

Legality of Non Redeemable Debentures

Section 120 of the Companies Act, 1956 permits the issue of such debentures. However, the guidelines issued by the Securities and Exchange Board of India (SEBI) have been framed keeping in mind issue of only redeemable debentures.

Implications

Investors in such debentures will have to wait for the company to go into liquidation for repayment of their investment. But, if the company commits a default in payment of interest on such debentures, investors can file a petition for winding up of the company and repayment of their investment.

Investor perspective

  • The issuing company may opt to redeem the debentures to reduce its interest liability;
  • In liquidation and winding up proceedings, non redeemable debentures rank for repayment second to last i.e. before only equity share holders;
  • The essential difference between such debentures and equity is that, while payment of dividend on equity shares is discretionary, payment of interest on the debentures is obligatory.
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Randolph Rowe is a professional banker and former General Manager of Small Industries Development Bank of India (SIDBI). He brings with him the wealth of 34 years of all-round experience in the banking sector - comprising 12 years with IDBI and 22 years with SIDBI - which he combines with his flair for writing.

5 COMMENTS

  1. I did not know anything about non-redeemable debentures. But after reading this article, I got a fair idea about non-redeemable debentures. Written in an experienced tone, the article provides the backbone for any student who is willing to learn about banking. I loved reading this article and want to read more articles from Mr. Randolph Rowe.

  2. Very easily explained article, you have heard of the terms redeemable and non redeemable stocks or debentures, but did not know what exactly it meant. I have got better understanding of what these terms are, and how the benefit the company and the investors.

  3. Mr.Rove explains the terms in a layman’s language. I always was scared of such terms because they are very confusing. But this article made the term very simple. The difference between equity and non redeemable debentures is that payment to debenture holders is compulsary while equity shares is not.

  4. A very informative and interesting article about non-redeemeable debentures. I was largely ignorant of the word and its implications but thanks to this article I now have a fair idea of it. Keep articles like this coming as they help laymen like us understand the complex terms associated with the world of finance. On the whole ,a very good article by the author.

  5. When we invest, and I mean old school investments; for a longer period of time, we expect to get something in return. Usually in the form of profit/interests for our money. As we all know very well, money is the most expensive commodity of them all. However if we invest in non-redeemable debentures, payment of interests is obligatory and not dependable on how companies board may decide. Therefore, our goal has been achieved.

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