Summary of this article
Key differences between convertible and non-convertible debentures
Ways in which retail investors can buy debentures
Debentures are key debt instruments issued by companies to raise capital, which offer investors a pre-determined and fixed rate of interest. The amount infused as capital is paid back to the investors when the debentures mature. For investors seeking a stable and continuous income, these debt securities can offer an opportunity for investors to limit the volatility in stock markets and generate a fixed income.
Broadly, there are two types of debentures that companies offer – convertible or non-convertible debentures (NCDs)
Convertible Debentures
These are hybrid debenture instruments. They offer the investor the option to convert their fixed income debt instrument to equity shares of the company. The date on which an investor can convert their debentures is specified at the time of issuance for a future date.
At the time of issuance, the company also lists out the specific conditions for converting these shares and the number of equity shares that the holder of the debenture will get at the time of conversion.
There can be different types of convertible debentures, depending on the terms of the conversion set. These terms are notified by the company at the time of issuance of these debentures. Convertible debentures typically offer lower interest rates than non convertible debentures.
Non-Convertible Debentures
NCDs are pure debt instruments which provide a fixed return till maturity. These debentures cannot be converted into equity shares, but offer a higher rate of interest than convertible debentures in order to compensate the investor for not converting them into equity shares.
The funds raised by the company through these debentures can be used for a variety of long-term capital requirements of the company. For investors looking to invest in these debentures, it is important to keep in mind a few things about the position of the company and the reliability of the returns offered.
Whether the debentures are secured or unsecured
Credit rating of the company and the debt instruments
Debt to assets ratio of the company
Capital adequacy ratio of the company
Taxation requirement of the proceeds from these debentures
How Retail Investors Can Invest
There are various options available for investors to buy both convertible and non-convertible debentures.
Private Market Offerings: Investors buy both convertible and non-convertible bonds directly from the company issuing these bonds, often during the initial public offering (IPO) of the company or in case of a special issuance. Investors can use Securities and Exchange Board of India (Sebi)-registered online bond platforms to buy these bonds.
Secondary Market: Once listed, investors can buy or trade in these instruments on the NSE or BSE. In this case, liquidity of a particular debenture becomes crucial to buy or trade in these securities.
Mutual funds or exchange-traded funds (ETFs): Investors can also invest through mutual funds or ETFs which provide an exposure to these debt instruments.
