Convertible Debentures

Meaning

A Debenture that is issued to the holder with an option to get it converted into the stock or shares from the issuing company as an alternative of taking the repayment of loan, but it does not include any accrued but unpaid interest thereon. These Debentures and bonds usually offer a more reduced type of interests to the investor but in exchange it gives them the possibility to change its securities for shares of the company.

Convertible Debenture is any form of Debenture, which can be converted into some other kind of security. Convertible Debentures can be converted into shares or Common Stocks. Convertible Debentures offer more safety to the investor compared to Common Shares or Preference Shares. Convertible Debentures are suitable for investors who look for potential increases in asset value (appreciation) compared to that yielded by Bonds, and more earnings than Common Stocks provide

Instead of receiving payment, the buyer of the debenture can chose to take stock or shares in the company. With convertible debentures, the cost of borrowing is lower for the seller since the buyer has the option of converting it into stock.

Convertible Debentures are either partially convertible debentures or fully convertible debentures. In case of partially convertible debentures part of the instrument is redeemed and part of it is converted into shares. In case of fully convertible debentures the full value of the debenture is converted into equity.

Convertible Debentures are generally issued to prevent sudden outflow of the capital at the time of maturity of the instrument, which may cause liquidity problems. The conversion ratio, which is the number of equity shares exchanged per unit of the convertible debenture, is clearly stated when the instrument is issued.

The market price of Convertible Debenture should not fall below its intrinsic value (book value or asset-based value). The intrinsic value is calculated by multiplying the number of shares converted at face value with the current market price of common stock.A

Convertible Debenture is one, which entitles its holder a right of conversion into share. The portion of debenture, which is fully convertible into shares, is termed as Fully Convertible Debenture portion (FCD) and the remaining portion, which is not convertible into shares, is termed as Non Convertible Debenture portion (NCD). The following points to be noted in this regard are as follows:
(a) Conversion takes place as per the terms of issue.
(b) Conversion can take place: (i) at a specified date (ii) after a specified period (e.g. on the expiry of 6 months from the date of allotment). (iii) Within a specified period (e.g. after the expiry of 3 year but within 5 years from the date of allotment).
(c) Conversion can take place even before the expiry of the specified period after passing the necessary resolution at the meeting of debenture-holders.