UNDERSTANDING DEBENTURES IN NIGERIA: ESSENTIAL INSIGHTS FOR ENTREPRENEURS AND INVESTORS

INTRODUCTION

In Nigeria’s evolving financial terrain, debentures have emerged as a cornerstone of corporate financing and investment. For entrepreneurs seeking reliable capital and investors pursuing stable returns, understanding the fundamentals, legal framework, and strategic applications of debentures is essential. The role of debentures as a secured credit transaction cannot be overstated. Not only have they enabled major corporations to float businesses and provided third parties with fixed-interest loan opportunities, but they have also empowered companies to raise capital through debt financing, serving as a versatile fundraising tool across industries.

This article explores the concept of debentures, their various types, and the legal and regulatory frameworks governing them in Nigeria. It will also examine the registration timelines, the benefits for businesses and investors, and the potential risks and considerations associated with this financing mechanism. At this pivotal moment in Nigeria’s economic ecosystem, a deep dive into debentures, their structure, significance, and strategic potential is both timely and essential.

A.   DEBENTURES IN A NUTSHELL

Debentures are unsecured debt instruments issued by corporations to raise funds from private individuals, corporate firms, the public, or institutional investors. Unlike secured loans that are backed by specific assets, debentures rely primarily on the creditworthiness and reputation of the issuing company. In Nigeria, they are commonly used by established companies to finance expansion, infrastructure projects, or other significant undertakings.

The Companies and Allied Matters Act (2020) makes provision for a Debenture, capturing it in section 868(1) as a “written acknowledgement of indebtedness by a company, setting out the terms and conditions of the indebtedness, and includes debenture stock, bonds, and any other securities of a company whether constituting a charge on the assets of the company or not.”

B.   LEGAL AND REGULATORY FRAMEWORKS GOVERNING DEBENTURES

Legal Frameworks

The issuance and regulation of debentures in Nigeria are primarily governed by the following legislations:

1.    The Companies and Allied Matters Act (CAMA) 2020 – This Act, with specific reference to sections 191 -231 covers creation of debentures, types of debentures, issuance of debentures, register of debenture holders, trustees for debenture holders, floating charges, and enforcement rights.

2.    Investments and Securities Act (ISA) 2025, and

3.    The Nigerian Securities and Exchange Commission (SEC) Rules (Consolidated 2013, as amended). The SEC provides detailed guidelines on issuing, trading, and disclosure requirements to ensure transparency and protect investors. Companies issuing debentures to the public must comply with SEC Rules on: registration of securities (as provided for in Rule 279), regulation of conduct of Securities Business, Securities Lending and Borrowing, Trading in Securities (as provided in Part G of the SEC Rules (Consolidated 2013, as amended).

It is noteworthy that recourse on Securities with respect to discourse on Debentures is premised on the fact that by virtue of the newly enacted Investment and Securities Act (ISA), 2025, Debentures are categorized as securities. For ease of reference, section 357 of the Act defines “Securities” as –

a)    Debentures, stocks, or bonds issued by a government;

b)    Debentures, stocks, shares, bonds, notes issued by a body corporate, any right or option in respect of any such debentures, stocks, shares, bonds, or notes;

c)     Virtual and digital assets;

d)    Investment contracts;

e)     Commodities, futures, contracts, options, and other derivatives; or

f)      Any other instrument deemed as securities which may be transferred by means of any electronic mode or which may be deposited, kept, or stored without any depository or custodian.”

Regulatory Frameworks

In the same vein, some regulatory frameworks applicable are:

1.    The Securities and Exchange Commission – They are one of the major bodies overseeing debentures in Nigeria, and the capital market landscape overall.

2.    The Central Bank of Nigeria – This is with respect to financial institutions issuing debentures

3.    The Nigerian Stock Exchange – They are crucial in regulating securities  

C.    LEGAL CONSIDERATIONS WHEN ISSUING OR INVESTING IN DEBENTURES 

When issuing or investing in debentures, certain legal considerations are paramount:

1.    Registration and Approval:  

Companies issuing debentures in Nigeria must comply with relevant regulatory requirements, including registration with the Securities and Exchange Commission (SEC) where applicable. For public offers, this involves providing detailed disclosures about the terms of the debenture, the issuer’s financial condition, and associated risks. Where a security interest or charge is created, proper registration must also be made under applicable laws, such as the Companies and Allied Matters Act (CAMA) 2020. Full compliance ensures the validity and enforceability of the issuance.

Under Nigeria’s regulatory framework, private companies, which are restricted from inviting the public to subscribe to their securities, may issue debentures through private placements without triggering full SEC registration, provided the offer is not publicly advertised and is limited to qualified investors. In contrast, public companies are permitted to make public offers and must obtain SEC approval even when raising funds through private placements. Pursuant to Section 308 of the Investments and Securities Act, 2025, and the SEC Consolidated Rules, 2013 (as amended), only public offers require full registration. However, under the SEC’s April 2025 Rules (New Rules on Issuance and Allotment of Private Companies’ Securities), private placements by private companies are still subject to a structured compliance regime, which includes mandatory filings of board resolutions, financial statements, and offering summaries. While exempt from public offer procedures, such placements remain under regulatory oversight to ensure transparency and investor protection, especially where applicable thresholds and investor classifications are observed.

2.    Security Arrangements:

Even though debentures are typically unsecured, if security interests are involved, they must be perfected through appropriate legal steps. The priority of security interests should be clearly established to determine the order of repayment in case of liquidation. Moreover, the enforcement mechanisms for security should be well understood by both issuers and investors.

3.     Terms and Conditions:

The debenture trust deed should clearly define the rights and obligations of both parties. This includes specifying interest rates and payment schedules, redemption terms, and any covenants or restrictions imposed on the issuer to safeguard investor interests.

4.    Default and Remedies:

It is crucial to specify the events of default, such as failure to pay interest or principal on time, insolvency, or breach of covenants. The procedures for enforcing remedies, including foreclosure or liquidation of security (if applicable), should be explicitly outlined to protect investors’ interests.

D.   WHEN TO REGISTER A DEBENTURE WITH THE SEC

1. When a debenture is issued to 50 persons or more, it is deemed a public offer.
2. When a debenture is advertised or promoted to the public.
3. When debenture funds are raised via retail investors or through institutional channels.

E.    TYPES OF DEBENTURES IN NIGERIA

Nigeria offers various forms of debentures tailored to different needs. They are as follows;

1.        Convertible Debentures: These can be converted into equity shares at a predetermined rate, providing potential upside for investors. By this conversion, the debentures amount to allotment, necessitating compliance with all the formalities for allotment. See section 197 of the CAMA 2020.

2. Secured or Unsecured (Naked) Debentures: By virtue of section 198 of the CAMA 2020, a Debenture may be secured by a charge or unsecured by any charge. A secured charge may be secured either by a fixed charge or a floating charge, whereas an unsecured charge is not secured by any charge.  
3. Non-Convertible Debentures: These provide fixed interest payments and are redeemed at maturity without conversion rights.
4. Redeemable Debentures: They are debentures which, by provisions of section 199 of the CAMA 2020, are liable to be redeemed at the option of the company. They are issued with a specified redemption date, offering clarity on repayment schedules. See also section 200 of the Act.
5. Irredeemable (Perpetual) Debentures: These have no fixed maturity date and may offer higher interest rates. In other words, they are irredeemable and are only redeemable upon the occurrence of a contingency, however remote, or the expiration of a long period. See section 196 of the CAMA 2020, and also the case of Knightsbridge Estates Trust V. Byrne [1939] Ch 441.

F.    BENEFITS FOR ENTREPRENEURS  

1. Access to Capital: Debentures provide an alternative to bank loans, often with more flexible terms.
2. No Dilution: Since debentures are debt instruments, issuing them does not dilute ownership or control.
3. Interest Deductibility: Interest paid on debentures is generally tax-deductible, reducing taxable income.

G.  BENEFITS FOR INVESTORS

1. Attractive Returns: Debentures often offer higher interest rates compared to savings accounts or government bonds.
2. Regular Income: Fixed interest payments provide steady cash flow.
3. Potential for Capital Gains: Convertible debentures offer the chance to benefit from equity appreciation.

H.   RISKS INHERENT (IF ANY) 

While debentures can be lucrative, they also carry risks:

1. Credit Risk: The issuer’s inability to meet interest or principal payments can lead to losses.
2. Market Risk: Fluctuations in interest rates can affect the value of debentures in the secondary market.
3. Liquidity Risk: Debentures may not be easily tradable, especially if the issuer is not listed on a recognized exchange.
4. Legal Risks: Non-compliance with regulatory requirements can lead to legal complications.

I.     TIPS FOR INVESTORS – UNDERSTANDING THE FINE PRINT OF DEBENTURES

ü  Conduct Due Diligence: Examine the issuer’s financial statements, credit ratings, and past borrowing history.

ü  Review the Trust Deed: Understand the terms, covenants, and redemption policies thoroughly.

ü  Diversify Investments: Avoid over-concentration in debentures of a single issuer.

ü  Seek Professional Advice: Engage financial advisors or legal experts to navigate complexities.

CONCLUSION 

Debentures serve as a significant financial instrument in Nigeria’s corporate and investment landscape. For entrepreneurs, they offer a viable means to raise capital without sacrificing control, while investors can benefit from attractive returns and portfolio diversification. However, due diligence, understanding regulatory requirements, and assessing associated risks are crucial to harnessing their full potential.

As Nigeria’s economy continues to grow and deepen its capital markets, debentures will remain a vital tool for fostering financial stability and supporting business expansion. Both issuers and investors should engage financial advisors or legal experts to help them stay informed, vigilant, and assist them in making sound financial decisions.

At AO2LAW, we maintain a foremost financial services advisory practice situated within our Commercial and Criminal Law Practice Group (CCLP). Our Practice brings to bear our expertise in core Financial Services and Technology Advisory, Regulatory Compliance, Mergers and Acquisitions, Maritime, and Capital Market services.   

For further information on the foregoing (none of which is legal advice) or related matters, please generally contact us at cclp@ao2law.com, or specifically contact the authors