What are Convertible debenture ?
Convertible debentures are those debentures which can be converted into specified number of equity shares of the company after the expiry of a specified period at the option of the holder of such debentures. It is not a separate source of raising funds but merely an extension of the issue of debentures. Simply an additional right (option) is given to debenture holders. Convertibility makes the debentures more attractive to the investors because it gives a fixed income to the investor and a chance of capital appreciation associated with the equity shares when the owner exercises his conversion option. Convertible debentures have recently become quite popular among investors in India precisely because of these advantages:
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The companies opt for convertible debentures as a mode of financing because of the following three reasons:
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I. It makes the securities more attractive to the investors. It thus ensures that the issue would be fully subscribed.
II. It is a plan under which a company can issue its equity shares at a higher price than its current market price which, at times, may be low.
III. It enables the company to raise a low cost capital (because interest on debt is a charged on profits and is a deductible expenditure while computing total income of the company) at the initial stage of investment and convert it into equity shares when the project has taken off so that funds are available for long term purposes. Thus, a company may avoid itself to become an over-capitalized company.