What Are Convertible And Non Convertible Debentures?

What do you mean by convertible debenture?

Getty Images A debenture holder is a creditor or lender of the company.


Convertible debentures are longterm debt instruments issued by a company that can be converted into equity shares of the company on a future date.


They can be fully, partially or optionally convertible..

Why do companies issue convertible debentures?

Companies issue convertible bonds to lower the coupon rate on debt and to delay dilution. A bond’s conversion ratio determines how many shares an investor will get for it. Companies can force conversion of the bonds if the stock price is higher than if the bond were to be redeemed.

Is convertible preferred debt or equity?

Convertible preferred stock is used by corporations for fundraising purposes. Companies can raise capital in two ways: debt or equity. Debt must be paid back regardless of the firm’s financial situation, but it generally costs less to obtain after tax incentives.

What is convertible loan stock?

Convertible loan stock: Usually refers to loans which may be converted into shares at a later date. Typically, the lender will receive interest for the duration of the loan and will then either convert the loan principle to shares or demand repayment, depending on which option is the most profitable.

What is compulsory convertible preference shares?

Compulsorily convertible preference shares are those that have to be converted into ordinary shares after a predetermined date. PE investors link the time of conversion to the company’s performance. This essentially means that the shares get converted only after the company achieves the promised growth.

What is the difference between NCD and bond?

NCDs are issued by public companies, whereas bonds are issued by government entities, large companies, and financial institutions to raise capital for the business purpose. Bonds are generally secured, whereas NCDs can be secured and unsecured.

What is NCD code?

When a contractor or fiscal intermediary makes a ruling as to whether a service or item can be reimbursed, it is known as a local coverage determination (LCD). When CMS makes a decision in response to a direct request as to whether a service or item may be covered, it’s known as a national coverage determination (NCD).

Who is called debenture holder?

A person having the debentures is called debenture holder whereas a person holding the shares is called shareholder. A shareholder subscribes to the shares of a company. … On the other hand, debenture-holders are the subscribers to debentures. Debentures are part of loan.

What are compulsory convertible debentures?

Compulsorily Convertible Debentures (CCDs) are considered to be hybrid instruments / and equity linked instrument, i.e. they are treated as debt till the time they are converted into equity. When they are issued it is a debt, after a period of time / milestone, it shall be compulsorily converted into shares.

Who can issue non convertible debentures?

Any corporate that fulfills the following criteria are eligible to issue the NCDs of less than one year: Having a tangible net worth as per the latest audited balance sheet, of not less than Rs. 4 crore; The company has been sanctioned working capital limit by bank/s or all-India financial institution/s; and.

What are the disadvantages of debentures?

Following are the disadvantages of debentures: ADVERTISEMENTS: (a) Payment of interest on debenture is obligatory and hence it becomes burden if the company incurs loss. (b) Debentures are issued to trade on equity but too much dependence on debentures increases the financial risk of the company.

What are debentures in simple terms?

A debenture is a type of debt instrument that is not backed by any collateral and usually has a term greater than 10 years. Debentures are backed only by the creditworthiness and reputation of the issuer. Both corporations and governments frequently issue debentures to raise capital or funds.

Are non convertible debentures safe?

An NCD is a type of loan that is issued by a company, which cannot be converted to equity. They are higher risk in nature when compared to a bank fixed deposits, since they run the risk of the issuer defaulting on repayments. Secured NCDs are safer than unsecured ones, but offer higher returns as well.

Which shares are not convertible?

Convertible Shares are those shares which can be converted in the equity shares whereas non convertible shares are those which cannot be converted in the form of equity shares. They are issued as preference shares and they remain the preference shares.

What is a non convertible bond?

Non-convertible bonds are the bonds which are used for the fixed income instruments usually given by the high-rated companies. If you invest in non-convertible bonds then you will get a higher interest rate than convertible bonds. … So here non-convertible bond gave the investors not high but a steady income over time.

Where can I buy non convertible debentures?

Non-convertible debentures are offered by companies through an open issue. Investors can buy the same in the primary market when the issue is open. They can also choose to purchase NCDs being traded on the stock market at a later point in time.

How do I sell NCD before maturity?

NCDs cannot be withdrawn before maturity. Since NCDs are listed on the stock market they can be sold in the secondary market. Bank FDs attract TDS if gains are beyond Rs.

What is meant by non convertible debentures?

Definition: Debentures are long-term financial instruments which acknowledge a debt obligation towards the issuer. … The debentures which can’t be converted into shares or equities are called non-convertible debentures (or NCDs).

How can I invest in non convertible debentures?

During the public issue, you can invest in them by submitting a form. Secondary market – You can also buy NCDs from the stock market. After the public issue, these bonds are listed on the NSE or BSE or sometimes on both. You can invest in these bonds just as you invest in shares.

How do I apply for a debenture?

You need to have the usual trading and a demat account to buy a non convertible debenture (NCD). The process to buy a NCD is the same as that for a share. You log into your trading account or ask your broker to buy you an NCD on your behalf. The manner in which you buy and the brokerage is the same as that for shares.

Are convertible debentures a good investment?

A convertible debenture will usually return a lower interest rate since the debt holder has the option to convert the loan to stock, which is to the investors’ benefit. Investors are thus willing to accept a lower rate of interest in exchange for the embedded option to convert into common shares.