myz-vgb.ru A Business Encyclopedia

Convertible Debentures

Definition: The Convertible Debentures are a type of loan that can be converted into the stock of the company after a stipulated time period at the option of the holder or the issuer in special circumstances. These are issued with the intent to raise money to expand or maintain the business operations at a considerable low-interest rate.

The debentures are the long-term debt instruments on which the company is obliged to pay interest to its holders. Sometimes, the debentures are issued with an option of convertibility in which the debenture holder can get his debentures converted into the stock of the company, either fully or partly.

As per the SEBI, the following provisions apply in case the debentures are converted into the stock either fully or partly:

  1. The conversion time along with the conversion premium should be stated in the prospectus.
  2. The conversion, partial or full, must be at the disposal of the debenture holder, provided the conversion takes place at or after 18 months but before 36 months.
  3. The conversion is to be made optional with “put” or “call” option in case the debentures provide for conversion after 36 months.
  4. In case, the conversion period of fully convertible debentures exceeds 18 months; then a compulsory credit rating is required.

Through above provisions, it is clear that the convertible debentures could be of three types:

  1. Compulsory convertible debentures provide for the conversion within 18 months of the issue
  2. Optional convertible debentures provide for the conversion within 36 months of the issue.
  3. Debenture with “call “ or “put” option in case the conversion exceeds 36 months.

The convertible debentures are beneficial to the investor since they get an opportunity to become the owner of the company and might leave in case the company experiences the loss. But however, the convertible debentures are unsecured and in case the company goes bankrupt, the holder gets his money only after all the secured creditors are paid.

The major disadvantage to the issuer is that, if the company makes huge profits, then the investor would like to become the shareholder or the owner which results in the dilution of ownership in the company.

Leave a Reply

Your email address will not be published. Required fields are marked *

Shares

Related pages


indifference curvemeaning of microfinanceexplain foreign exchange ratesliquidity adjustment facilityethnocentricism definitionwhat is a flanker brandsuperego examplesdefinition of shrmaging of receivables schedulebank lockboxdeclining marginal utilitywhat determines the price elasticity of demandethnocentric geocentric polycentricdefinition of microfinance institutionsmeaning of monopolistic marketdefine inventories in accountingcost push inflation demand pull inflationpurpose of induction programkiosk in bankingbureaucratic organizational structure definitionoligopoly meaning in economicsbargaining means in hindieconomic profit meaningdefine indifference curve in economicsjargons meanspavlov's theory of classical conditioninghr scorecard definitionsocial factors affecting consumer buying behaviourthe recovery phase of the business cycle ends whenwhat is delphi method of demand forecastingdefinition of payedfactors affecting income elasticity of demandmeaning of arouse in hindilaissez faire leadership exampleretained earnings representsprovident fund act in indiafactors governing demand forecastingtransactional exposurewhat is the profitability ratiostress and stressors definitionerg theory of needsadvantages of laissez faire leadershipdefine teleology ethicsdefine commercialsexplanation of johari windowmarket segmentation refers tolikert methodincome tax return form itr-1afc meaningtalent poachingcash ratio investopediasemantic differential scale examplesdefinition of delegatingneft batch timingdescribe laissez-faireblake and mouton's managerial gridpluralist industrial relationsdeontology in business ethicsinfluence meaning in hindimm theory of dividend policythe blake and mouton managerial gridpiecework compensationphysiological barriers to effective communicationdefinition of elastic and inelasticlockbox bankethnocentric staffingwhat is diminishing marginal utility in economicsbudget constraint meaningwhat is neft fund transferalderfer hierarchy of needssample proportion definitioncharacteristics of sampling distributiondemand forecasting in managerial economicsmeaning of higher purchasemeaning of repo rateteleological systemsalivation definition