Debentures are popular business tools for raising money. It is an unsecured long-term business debt and an excellent funding option for companies. It is also a great choice for businesses with fewer finances. Those who want to prevent the dilution of their equity can opt for it.
What Are Debentures?
Debentures are financial solutions for companies that do not want to tie down their assets. It is a debt instrument that ranges from medium to long-term. Companies use debentures to borrow money at a fixed interest from people. They are also great for those that do not have enough collateral for a loan. A debenture certificate holds the following information:
- Interest rate
- Payment schedule
- Maturity date and other features.
- The amount of the loan.
A debenture usually states how much money the investor has given as principal and at how much interest. It also declares the payment schedule and maturity date of the debenture.
Types of Debentures
There are various types of debentures:
- Secured and Unsecured
- registered and Bearer
- First and Second, and
- Convertible and Non-convertible
In this article, we will be discussing the last two- convertible debentures and non-convertible debentures.
What are Convertible Debentures?
The debentures that can be converted into the company’s equity shares are called convertible debentures. You can consider them long-term debt trackers and they have a low rate of interest.
Features of Convertible debentures:
- Can be converted to equity shares.
- Have a low-interest rate.
- Value on maturity depends on the share price of the company at that time.
- Can be converted into equity during bad market conditions.
- Holders of convertible debentures are both creditors and owners of the company.
Convertible debentures are of two types:
- Fully Convertible Debenture- When the whole value of the debenture can be converted into equity, it is fully convertible.
- Partially Convertible Debenture- When only a part of the debenture can be converted into equity, it is partially convertible.
What are Non-Convertible Debentures?
These debentures usually cannot be turned into equity shares. A very high-interest rate is the main feature of these debentures.
Features of Non-Convertible Debentures:
- Can not be converted into equity shares.
- High-interest rate.
- Value at the time of maturity is fixed.
- Can not be converted during bad market conditions.
- Holders of non-convertible debentures can only redeem them at maturity.
- Non-convertible debenture holders are only the creditors of the company.
- Riskier as compared to convertible debentures.
Non-convertible debentures are of two types:
- Secured non-convertible debentures-This form of a non-convertible debenture is more secure because they are backed by the company’s assets. The investor can always liquidate the assets of the company in case the company fails to pay on time.
- Unsecured non-convertible debentures- Since there is no collateral involved, they prove to be riskier and less secure. In this case, the investor has to wait until the company can pay. The interest rate for these non-convertible debentures is higher than that of convertible debentures.
Non-convertible debentures reward investors with the following compared to convertible ones:
- Increased returns.
- Low risks.
- Tax benefits.
Key distinctions between convertible and non-convertible debentures
The article above has provided you with enough details on both debentures. Despite their differences, both have benefits to offer to the investor. To better understand them, you have to learn more about both kinds of debentures.
CD: It allows the investor to convert debentures to equity shares of the company.
NCD: It does not allow investors to do the same. Hence, it does not meet this specification.
- Rate of interest
CD: Convertible debentures have lower rates of interest.
NCD: They have high-interest rates.
- Value at maturity:
CD: Their maturity value depends on the company’s current market value. There is a chance of getting higher or lower returns. It depends on how the company performs at the time of maturity.
NCD: For non-convertible debentures, the value at maturity is fixed and does not change.
CD: Convertible debenture owners are creditors as well as the owners of the company. Thus, they enjoy a dual status.
NCD: Non-convertible debenture owners are only considered the creditors of the company.
- Market conditions:
CD: Its owner can convert finances into equity shares whenever they want. It proves to be very beneficial during poor market conditions.
NCD: The NCD owner has no choice but to wait until debenture maturity to receive the shares. They are redeemed only at maturity.
- Stability factor:
CD: Convertible debentures are less risky and hence a stable option.
NCD: Non- convertible debentures are riskier and have a lesser stability factor. This is a major drawback for them.
Considering the various options of convertible and non-convertible debentures needs proper research. There are a lot of things you need to assess. New business owners do not want to bring their share values down. Debentures are a viable and safe option for them. It is also a good choice for already established firms that do not want to split assets. Convertible debentures and non-convertible debentures have significant differences. Yet, both have proven to be beneficial in their ways.
These debentures are excellent choices for an investor. Yet, one should have proper knowledge of how to invest. Experts advise that 10% of investments should be put into convertible debentures. The rest can be utilized for other choices.
Thus, one should seek financial advisors from trusted sources. It will help you build your financial profile to a better scale. Piramal Finance would be one of your best choices in this case.
For further details, you can visit our website. It will be our sincere pleasure to answer all your queries.