Convertible Vs Non-Convertible Debentures: A Comparison

Issuance and Trading of NCD investment is in the demat form only. Another is a trustee, through which a company communicates with a holder. The company draws an agreement between a holder and trustee. This is known as a ‘Trust Deed’, which specifies obligations of a company, holder’s rights and other necessary details.

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They offer higher interest, minimal risk, liquidity, and tax advantage to investors compared to convertible debentures. It must be noted that convertible debentures yield a lower interest when compared to pure debt instruments. Such debentures can be exchanged for stocks at specific times; in turn, enabling bondholders to offset at least some risks involved with putting money in them. A company issues debentures to raise capital from the public as a loan. A company can issue any type of debenture based on its requirement.

After conversion, the holder holds similar rights as a shareholder in the issuing company. Non-convertible debentures are a form of debt instrument issued by companies to raise money from investors. The main advantage of NCDs for companies is that they are not convertible into shares, which means the investor can’t earn any equity in return for their investment. However, there are many advantages to investing in an NCD. Convertible debentures meaning can be described as a long-term debt instrument.

Answer the Following Question in One Sentence. What Are ‘Convertible Debentures’ ? – Book Keeping and Accountancy

A non-convertible debenture does not entitle a holder to convert his or her debentures into an equity share. This debt instrument has a higher interest rate than its regular counterparts. However, it is impossible for all the prevalent companies who have just set up their business recently. A) the consent of the shareholders is to be obtained only for the purposes of fixing the price of conversion and not for the pre-poning and postponing the timing of the conversion approved by CCI. The conversion price shall be reasonable and the conversion price shall not exceed the face value of that part of the convertible debenture which is sought to be converted. Provided that if for any reasons the company fails to create security within 12 months from the date of issue of debentures the company shall be liable to pay 2% penal interest to debenture holders.

No need to issue cheques by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment. No worries for refund as the money remains in investor’s account. However, investment in debentures can offer comparatively higher returns to investors than bonds. After weighing both the pros and cons of the two, it’s up to you to decide whether you want to invest in bonds or debentures based on your investment objectives.

There are several factors that determine the conversion price. Some of them are the current book value, market price, expected appreciation in the value of equity shares, etc. Thus, the company should not set the conversion price too low or too high. They should set at a level so that the investors gain immediately from the conversion privilege. A convertible debenture provides regular interest income through coupon payments and repayment of principal amount on maturity. The decision to convert these debentures into equity shares lies with the holder as they are the creditors of the company.

Headquartered in Mumbai, 5paisa.com – a subsidiary of IIFL Holdings Ltd , is the first Indian public listed fintech company. Another lesser-known debenture type is the partially convertible debenture. In this case, the company that issues the debenture dictates the percentage of the debenture that may or may not be converted into company stocks. Investments in securities market are subject to market risk, read all the related documents carefully before investing. InterestThey have a lower interest rate as they can be converted into equity shares.

What are the various types of bonds?

When compared to convertible debentures, they provide superior yields, liquidity, minimal risk, and tax advantages to investors. Debentures are a sort of long-term debt instrument that does not have any collateral backing them up. In other words, debentures are not secured or have no security. Debentures, along with bonds, are one of the most common types of debt securities. Debentures are often issued by corporations and, in certain cases, the government to collect cash from the general public. They are like non-convertible bonds, which are a common type of financial instrument.

The former strategy allows investors more flexibility since price fluctuations don’t affect returns much. However, some investors prefer investing via this method because it requires less work to monitor daily price movements, which can get monotonous after a while. Non-convertible debentures are a type of debt instrument that provides a fixed return to the investor. The only way for an investor to get liquidity from NCDs is by selling them in the secondary market or redeeming them at face value before maturity. NCDs have a set maturity date, and the interest can be paid monthly, quarterly, or yearly, depending on the fixed term chosen.

• For example, a 8% yield means that the investment averages 8% return each year till maturity.
• 10.1.2 For a public / rights issue of debt security of issue greater than or equal to Rs.100 crores two ratings from two different credit rating agencies shall be obtained.
• Since this is the case, the value of the debenture depends on the reputation of the company or the party that has issued the debenture.
• Thus, the company should not set the conversion price too low or too high.
• The details of these client bank accounts are also displayed by Stock Exchanges on their website under “Know/ Locate your Stock Broker”.

convertible debentures meaning NCDsUnsecured NCDs are considerably riskier than secured NCDs since the company’s assets do not back them up. As a result, if the firm fails to make a payment, the investors have little alternative but to wait until they are paid because the company has no assets to recover their losses. Unsecured NCDs, on the other hand, have a higher interest rate than secured NCDs. On the other hand, the maturity value of the non-convertible debentures remains fixed, and they give fixed returns on maturity.

Who Should Invest in Bonds & Debentures?

Additionally, debentures are redeemed over a long period of time, giving the company enough time to complete its obligations. Non-Convertible Debentures are essentially debt securities that have a set repayment schedule and cannot be converted into equity. Investors benefit a lot from NCDs since they provide guaranteed returns, low risk, and tax advantages. Many companies can raise capital by offering shares to the public. However, it is not possible for all companies to go public, especially those that have been established recently. Another alternative method of obtaining funds is through borrowing.

Better returnsSecured NCDs provide a higher NCD interest rate to their investors. Only companies with a good credit rating can issue secured NCDs. NCD investment can be held by individuals, banking companies, primary dealers other corporate bodies registered or incorporated in India and unincorporated bodies.

A credit rating also signifies the likelihood a debtor will default. It is also representative of the credit risk carried by a bond. A credit rating is, however, not an assurance or guarantee of a kind of financial performance by a certain instrument of debt or a specific debtor.

An NCD’s credit rating indicates the issuer’s ability to repay its obligations. Credit ratings are generally assigned by credit agencies, such as CRISIL. This rating is based on various factors such as the issuer’s financial strength, track record of repayment of loans, etc.

Additionally, DRR ensures that sufficient funds are available to satisfy the obligations of debenture holders. Lump sum redemption is when the debenture holders receive the amount they were promised on a specified date. According to this method of redemption, the debenture holders receive their agreed value in a single lump sum payment. The lump sum is the total principal amount of all debentures whose redemption occurs without a premium or discount.

Convertible debenture holders are paid before other stockholders in the event of liquidation of the company. Coupon payment –Its value depends on an issuer’s credit quality and prevailing interest rates. The break-even analysis proves useful in comparing coupon payouts against dividend yields of common shares. These are other prominent features of convertible debentures.

Let us look at the points of differentiation between convertible and non-convertible debentures. Investors receive a fixed-rate and also have the option to partake in stock price appraisal. Efiling Income Tax Returns is made easy with ClearTax platform.

Simply put, it is a legal document that mentions the principal amount, the interest rate, and the schedule of payments. At maturity, the investor receives both the principal and the interest. Sub-clause shall not apply to the issue of fully convertible debentures providing conversion within a period of eighteen months.Premium amount and time of conversion shall be determined by the issuer company and disclosed. Certain issuers, with credit rating below investment grade, had in the past issued both a secured NCD and another unsecured one through the same offer document, with different credit ratings. They carry higher interest rates than other bonds because they are riskier to hold. NCDs are unsecured instruments, so issuers need to compensate investors for taking on this increased risk.