What Does Convertible Debenture Mean?

A type of loan issued by a company that can be converted into stock by the holder and, under certain circumstances, the issuer of the bond. By adding the convertibility option the issuer pays a lower interest rate on the loan compared to if there was no option to convert. These instruments are used by companies to obtain the capital they need to grow or maintain the business.

Convertible Debenture
Convertible debentures are different from convertible bonds because debentures are unsecured; in the event of bankruptcy the debentures would be paid after other fixed income holders. The convertible feature is factored into the calculation of the diluted pershare metrics as if the debentures had been converted. Therefore, a higher share count reduces metrics such as earnings per share, which is referred to as dilution. Convertible Debenture:
There are different motives for issuing convertible debentures that are witnessed among the issuers. From the issuer's point of view, the principal motive of financing with the help of convertible debentures is diminished cash interest payment. Nonetheless, in substitution of the advantage of decreased interest payments, the stockholder's equity value is diluted as a result of stock dilution. This is anticipated when the convertible debenture holders substitute the debentures with fresh stocks. The popularity of convertible debentures among the issuers is increasing at a rapid pace and there are various explanations for their growing applications. The explanation behind this can be broadly categorized into the following types:

Conventional or Traditional Explanations
Reviews offered by finance professionals have opined about two common motives for issuance of convertible debentures and they are the following:

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They enable the companies in issuing loans at a cheaper rate They offer the companies a chance for issuing equity shares at a premium on the present value in the future

However, these explanations are debatable due to the following reasons

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Cheaper Debt: The coupon rate offered by debentures with warrants or convertible debentures is usully less in comparison to the common debentures. Equity at a premium: The exchange price related to a convertible debenture or a subscription value for practicing the warrant is usually more in comparison to the price on which the stock or equity may be issued at the present time. Therefore, a number of finance professionals assume that debentures with warrants or convertible debentures allow a firm in issuing equity at a premium. This is also debatable because if the conversion price of a stock is $25, and the share price falls below $25, then the convertible debentureholders would not practice the conversion option. In such a situation, the firm is not guaranteed about an issue price of $25 in the future. Thus it can be concluded that convertible debentures are not dependable measures to issue stock or equity at a premium.

and they are entitled to some of the funds when a company is liquidated. they are considered creditors. For the seller. There are several different types of convertible debenture available. with the remainder of the value being repaid by the company. Qualified institutional placement Qualified institutional placement (QIP) is a capital raising tool. According to these theories. allowing the buyer to take advantage of the agreed-upon sale price to make a significant profit. whereby a listed company can issue equity shares. it carries a potentially higher return. a company might issue bonds. When purchasing convertible debentures. which can be converted partially into shares. primarily used in India. fully and partly convertible debentures. Cash Flow Matching: The companies opt for financing tools that are easily maintained. the debt instrument is known as a fully convertible debenture. and any contingencies which may dictate how the debenture can be used and when it can be converted. . this convertible debenture carries a lower interest rate. or of a radical decline in stock value which makes conversion inadvisable. A nascent but risky company should look for convertible debentures due to the smaller interest burden at the beginning stage. The issuer can also decide to convert a convertible debenture. and for buyers. the motives for issuing convertible debentures are the following: • • Financial Synergy: Debentures with warrants or convertible debentures are suitable while it is quite expensive or not easy to analyze the risk features of the issuer. people should take note of which kind of debenture is being purchased. If a company fails and the holders of debt instruments have not yet been repaid. In a classic example of a convertible debenture. Investors can also opt to purchase partially convertible debentures. Buyers rely on the reputation of the issuer to ensure that they will be paid back. rather than having the advantage of a secure backing. Convertible debentures offer a security measure from erroneous risk analysis. classically stock in a company. using the capital from the bond sales to fund a project. People who purchase convertible debentures run the risk of not recovering their funds.Contemporary Financial Explanations Contemporary financial theories explain better reasons behind the recognition of debentures with warrants or convertible debentures.Debentures are unsecured. Agency Costs: Convertible debentures with warrants are able to extenuate difficulties faced by agencies related to financing. or any securities other than warrants which are convertible to equity shares to a Qualified Institutional Buyer (QIB). as the value of the stock may grow. Companies may use convertible debentures as a financing tool which allows them to raise capital without having to sell stock. The bondholders could opt to convert their bonds into stock at an agreed-upon price. and it can help to consult a financial advisor when considering the purchase of these debentures. When this is an option. such as a maturation date or a minimum stock price for conversion. • Convertible debentures are debt instruments which can be converted into another type of security. or to accept repayment of the bond funds.

The placement document is placed on the websites of the stock exchanges and the issuer. Who can participate in the issue? The specified securities can be issued only to QIBs. who shall not be promoters or related to promoters of the issuer. it is mandatory for the company to ensure that there are at least two allottees. During the process of engaging in a QIP. such as American depository receipts (ADRs). with appropriate disclaimer to the effect that the placement is meant only for QIBs on private placement basis and is not an offer to the public. No individual allottee is allowed to have more than 50% of the total amount issued. Prior to the innovation of the qualified institutional placement. there was concern from Indian market regulators and authorities that Indian companies were accessing international funding via issuing securities. if the size of the issue is up to Rs 250 crore and at least five allottees if the company is issuing securities above Rs 250 crore. 2006[1]. This was seen as an undesirable export of the domestic equity market.Apart from preferential allotment. Moreover. The complications associated with raising capital in the domestic markets had led many companies to look at tapping the overseas markets. the company needs to issue a minimum of 10% of the securities issued under the scheme to mutual funds. companies need to fulfil certain criteria such as being listed on an exchange which has trading terminals across the country and having the minimum public shareholding requirements which are specified in their listing agreement. Also no issue is allowed to a QIB who is related to the promoters of the company. so the QIP guidelines were introduced to encourage Indian companies to raise funds domestically instead of tapping overseas markets. in outside markets. There is no pre-issue filing of the placement document with Sebi. this is the only other speedy method of private placement whereby a listed company can issue shares or convertible securities to a select group of persons. The issue is managed by a Sebi-registered merchant banker. Why was it introduced? The Securities and Exchange Board of India (SEBI) introduced the QIP process through a circular issued on May 8. to prevent listed companies in India from developing an excessive dependence on foreign capital. What are some of the regulations governing a QIP? To be able to engage in a QIP. QIP scores over other methods because the issuing firm does not have to undergo elaborate procedural requirements to raise this capital. .