Convertible Vs. Non-Convertible Debentures: A Comparison

Debentures are considered popular debt instruments issued by a company to raise capital from the general public. Such capital is raised to help companies steer their business operations. Not to mention, a debenture is a long-term debt instrument that is not secured by any collateral.

A debenture is typically categorised based on redeem-ability, convertibility, and transferability. Based on convertibility, debentures can be categorised into two types.

• Convertible debentures
• Non-convertible debentures

Let’s understand the difference between convertible and non-convertible debenture.

Difference Between Convertible and Non-Convertible Debts

Here is the definition to understand the difference between convertible and non-convertible debentures.

Convertible Debenture

Convertible debentures are a type of long-term debt that a company issues. It can be transformed into a stock market after a fixed interval. Furthermore, convertible debentures are mostly unsecured bonds with no hidden security for additional support.

Like any bond, these long-term debt securities pay interest to the bondholders. One of the most notable features of convertible debentures is that they can be replaced with shares at prearranged intervals.

Note: Certifying a sense of security for the bondholder reduces the risk concerning investments in unsecured debts.

Non-Convertible Debentures

Non-convertible debentures are viewed as fixed-income instruments. However, they cannot be transformed into shares. Such debentures have a fixed maturity date. Hence, the interest can be earned:

• monthly
• quarterly
• yearly, as preferred

Not to mention, such debentures provide higher interest and tax benefits to investors at minimal risk.

Convertible vs Non Convertible Debentures

Here is a detailed overview of the difference between convertible and non-convertible debentures in a table format:

[table id=22 /]

Why do Companies Issue Convertible and Non-convertible Debentures?

A corporation may want to raise money by selling convertible bonds for two reasons. The company expenses can be very convincing. In comparison to a non-convertible debenture, convertible bonds have reasonable interest payments. Such interest cost-savings can be very significant.

Because of the possibility of conversion and gaining from it in stock price, investors accept the lower interest payments.

Likewise, when companies require quick capital for business operations and expansions, non-convertible debentures are issued.

As a result, more investors are attracted, thanks to the higher coupon rate. Consequently, the company gets the required funds for its expansion, and the investors reap higher returns.

How to Buy Both Types of Debentures?

In order to buy a debenture or non-debenture, it is best recommended to get in touch with a brokerage firm equipped with specialists in convertibles.

The process of buying a debenture is similar to that of buying a share. One needs to log into the trading account or request a broker to buy a debenture instead. NCS are saved in demat accounts.

Note: It is important to note that several brokerages do not provide direct investment in convertibles.

Final Word

To conclude, debentures are unsecured debt instruments or tools not secured by any collateral. Debentures can be categorized based on redeemability, convertibility, and transferability.

With the information provided above, it will be easy to decide the amount to be invested in debentures and other investment options like bonds.

FAQs

Can Debentures be Considered Assets or Liabilities?

Since debentures are financial debt instruments and are a type of secured company loan, they are considered long-term liabilities.

How is a Debenture Different from a Bond?

Debenture and bond are both considered debt instruments. But, on risk parameters, both these debt instruments differ. Debentures do not have any collateral, while bonds have security assets.

Who can Issue Debentures?

Both public and private companies are eligible to issue debentures. Often the government issues debentures to the public in order to raise capital. Partnership firms, sole proprietorships, and individuals are not allowed to issue debentures.

Should NCDs be purchased from one Single Sector only?

No. Non-convertible debentures from one single sector are considered risky investments. They can led to a higher risk exposure.