Difference between Convertible & Non-Convertible Debentures

Let us look at the difference between convertible and non-convertible debentures. The comparison can be drawn on different parameters, which are discussed below.

Jul 01, 2021 11:07 IST India Infoline News Service

Financial Advisor
Debentures, along with bonds, are one of the most popular debt instruments. Usually, when companies, and sometimes even the government, wishes to raise funds from the public, they issue debentures.

There are different types of debentures, which are categorised based on redeem ability, transferability and convertibility. Based on the convertibility, debentures are further classified into two types – convertible debentures and non-convertible debentures.

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.

Let us look at the difference between convertible and non-convertible debentures. The comparison can be drawn on different parameters, which are discussed below.

Definition

Convertible debentures are a type of debentures that can be converted into equity shares of the company.

Non-convertible debentures are defined as the type of debentures that cannot be converted into equity shares of the company.

Rate of Interest

The convertible debentures have a lower interest rate than non-convertible debentures since the holders have the advantage of converting them into equity shares.

The non-convertible debentures have a higher interest rate. However, these debentures are considered a little risky than convertible debentures and bonds.

Maturity value

The maturity value of convertible debentures mainly depends on the company's stock price at the time of issuing the debenture. If the stock price is high, it will give higher returns, and low stock prices mean it will provide low returns. A vanilla convertible bond provides the investor with the choice to hold the bond until maturity or convert it to stock. If the stock price has decreased since the bond's issue date, the investor can hold the bond until maturity and get paid the face value.

On the other hand, the maturity value of the non-convertible debentures remains fixed, and they give fixed returns on maturity.

Status

This is one of the significant distinguishing factors between convertible and non-convertible debentures.

If you hold convertible debentures, you can enjoy either the status of being a creditor to the company or the owner of the company.

Whereas, if you hold non-convertible debentures, your status will be the creditor of the company.

Final Word

Now that you are aware of the difference between convertible and non-convertible debentures, carefully assess your investment goals before making the final decision. Generally, experts suggest that it is best to put 5 to 10% of investment savings in the convertible debentures and invest the rest in the traditional bonds and other investment options.

You can consider investing in IIFL Home Loan Bonds. It is issued by IIFL Home Finance Limited, the non-banking finance arm of the IIFL Group. It has a long-term AA+/Negative credit rating by Brickwork and an AA/Stable rating by CRISIL. Click here to know more about IIFL Home Loan Bonds.  

Related Story

Open Free Demat Account (Rs699)