Understanding Debentures in India: A Practical Guide for First-Time Founders

This article was written by Archismaan Tyagi, Associate, and Karthik Jayakumar, Partner.

If you’re raising capital for the first time, chances are you’ll hear terms like “We’ll invest ₹50 lakhs through CCDs” or “We prefer NCDs at this stage.” To a new founder, the jargon can sound intimidating. But at its core, a debenture is simply a structured loan. The real task lies in understanding which type of debenture suits your stage of growth and aligns with your long-term fundraising strategy.

What is a debenture?

Unlike equity investments, where investors immediately become part-owners of your company, debentures function as borrowings with pre-agreed repayment terms. They often carry interest obligations and a maturity period. For startups, they provide a way to access capital without instant dilution of ownership. Whether or not dilution happens later depends on the variety of debenture you choose.

The Three Main Types of Debentures in India

1. Non-Convertible Debentures (NCDs)

NCDs are straightforward debt instruments. The investor lends money, you pay interest at regular intervals, and the principal is returned at maturity. There’s no conversion into equity at any stage.

• Fixed repayment schedule and interest

• No dilution of founder equity

• Higher repayment priority compared to shareholders

When used: More common in growth-stage companies with steady revenue streams, where founders want to avoid giving up additional ownership, but rather prefer pure play debt.

2. Compulsorily Convertible Debentures (CCDs)

CCDs start out as debt but are required to convert into equity or preference shares within a certain period, or once a specified trigger occurs. They are by far the most common structure in early-stage venture funding.

• Begin as debt but must convert to equity

• Conversion terms often tied to the next funding round

• Provide early investors with downside protection while deferring valuation discussions

When used: Ideal for seed and early-stage rounds where it’s too soon to pin down valuation. Angels and VCs in India like CCDs because they allow quicker investments while keeping pricing flexible until the company shows more traction.

3. Optionally Convertible Debentures (OCDs)

OCDs give investors flexibility. They can choose to either redeem the debenture as debt or convert it into equity, depending on the company’s progress or pre-agreed milestones.

• Investors decide later whether to stay in debt or convert

• Conversion conditions linked to performance

• Rare in conventional VC deals, but used in strategic partnerships

When used: Often favored by corporates or strategic investors who want to assess performance before locking in as shareholders.

Who Uses What, and When?

• Seed / Pre-Series A: Angels and early VCs lean toward CCDs. These instruments postpone valuation debates and offer downside protection while allowing fast execution. 

• Growth Stage: Debt funds, banks, or conservative investors prefer NCDs for predictable interest income without equity exposure. 

• Special Cases: OCDs enter the picture when strategic investors want conditional commitments tied to milestones or partnerships.

NCDs, CCDs, and OCDs in India