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.
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.
- 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.