Convertible debentures are often used by companies as a financing tool so as to raise a certain amount of capital. This will allow them to retain the stocks, for a certain duration instead of selling them to raise the working capital amount. So when a company needs to borrow a considerable amount of money, it will invite the general public to subscribe or buy its debentures. Debenture is issued in the form of a certificate by the company as an acknowledgment of the debt due by it to its holders. In the following paragraphs we will learn its definition and what are the various types, so keep scrolling.
What are Convertible Debentures?
It is basically is a type of commercial loan or a debenture. As the name suggests, it gives a lender the option of converting a loan into stock. So the company who has issued the debentures can convert these into equity shares after, during or on certain dates, making the debenture holder, a share holder. This conversion factor also depends upon the type the company has issued and the exact agreement between company and debenture holders. The 'convertible' factor is often added to the commercial loan so as to attract the buyers as they can be the share holders later.
What are the Different Types?
Remember that the terms and conditions regarding the duration of time after which the debenture will be converted, the ratio of conversion, etc. needs to be understood well, before the accounting for convertible debentures is done. Basically the company decides the rate of interest, repayment amount, and the time of repayment of debenture. It's a document which mentions all these details and on which the company writes that it is taking a loan from the debenture holder.
Partly Convertible Debenture
This is a common type of debenture where in only a part of the entire amount is convertible. So only the decided amount of debentures will be converted into equity shares after a certain period of time and the rest will be redeemed. The ratio of conversion is told before issuing such debentures.
Fully Convertible Debenture
This means, after a certain duration of time, the complete amount of debentures will be converted into equity shares of this company according to the terms and conditions mentioned at the time of issuing the debenture. The process starts after 18 months from the date of issuing of debentures and is to be done before 36 months. So once converted, the holder will be one of the share holders of the company.
Compulsory Convertible Debenture
This is the third type which slightly differs from the fully convertible debenture. Basically this mentions that the whole value of the debenture will be converted into equity shares by a specified time. As mentioned above the time is already mentioned in the debenture document. Once the conversion is done the debenture holder is a share holder. Many people prefer this type of debenture instead of going in for a partial debenture.
Many opt for these as they get the option of becoming a share holder of the company so that they can later earn by stock trading or if the money is redeemed they are earn higher interest rates as compared to the banks. Make sure you understand the terms and conditions well before you sign the document.
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