14 Oct, 2025
4 mins read
Convertible debentures are financial instruments that combine features of debt and equity. They allow investors to earn fixed interest at first and later convert their investment into shares of the company. This makes them flexible for investors and useful for companies looking to raise funds.
A convertible debenture is a long-term debt instrument issued by a company. It can be converted into equity shares after a set period or under specific conditions.
It starts as a bond and pays fixed interest. Later, it gives the option to convert the investment into company shares.
Companies use these debentures to raise money without giving up ownership immediately. For investors, they offer stable returns first and the chance to earn from share price growth later.
Convertible debentures are classified based on how and when they are converted into shares:
Fully Convertible Debentures (FCDs): The entire amount is converted into equity shares. No repayment is made in cash.
Partly Convertible Debentures (PCDs): A portion is converted into shares. The remaining amount is repaid in cash at maturity.
Optionally Convertible Debentures (OCDs): Investors can choose to convert the debenture into shares or take back the money.
Compulsorily Convertible Debentures (CCDs): The conversion into equity shares is mandatory after a fixed period.
Each type has different benefits, depending on the needs of the company and the preference of the investor.
Some key features include:
Interest payments: Investors earn regular interest until conversion.
Conversion ratio: This shows how many shares the investor gets after conversion.
Conversion period: The period after which conversion is allowed.
Maturity date: The date when the debenture is either repaid or converted.
No voting rights: Investors do not have voting power until they become shareholders.
Market-based value: The value of conversion depends on market prices or a fixed conversion price.
Convertible debentures benefit both investors and companies.
Fixed income: They offer regular interest payments initially.
Growth opportunity: Investors can benefit from a rise in share prices after conversion.
Lower risk: Since they begin as debt, they carry less risk than pure equity.
Better claim: In case the company is liquidated, debenture holders are paid before shareholders.
Lower cost: Interest on convertible debentures is usually lower than on regular loans.
Delayed dilution: Company ownership is not affected until the conversion takes place.
Wider reach: These instruments appeal to investors looking for both safety and growth.
Let’s say a company issues fully convertible debentures worth ₹100 crore at an interest rate of 7% per year. These debentures will convert into shares after 3 years. The conversion price is ₹200 per share.
If an investor buys debentures worth ₹1 lakh, they earn ₹7,000 every year for three years. At the end of three years, the amount is converted into 500 shares (₹1,00,000 divided by ₹200). If the share price rises to ₹300, the value of the shares becomes ₹1.5 lakh.
Despite the benefits, there are some limitations:
Market risk: If the share price falls, the value of the converted shares may be lower.
Lower interest: These debentures may offer less interest than regular bonds.
Dilution: When converted, new shares reduce the percentage of ownership of existing shareholders.
Complexity: Investors must understand the conversion rules and timelines.
Tax: Interest is taxed. Gains from selling converted shares may also be taxed.
Convertible debentures are a smart option for investors who want fixed income with future growth potential. They suit companies that want to raise funds without giving up ownership immediately. However, investors should understand the terms, risks, and tax rules before investing. These instruments can be valuable, but only when used with proper knowledge and planning.
It is a loan you give to a company. You earn interest, and later, your loan can be turned into company shares.
They are safer than shares in the beginning since they offer fixed interest. After conversion, the value depends on the share market.
Yes. Most are listed on stock exchanges. You can sell them before the conversion date.
Yes. Interest is taxed as income. If you sell the shares after conversion, any profit is taxed based on how long you held them.
Calculate your Net P&L after deducting all the charges like Tax, Brokerage, etc.
Find your required margin.
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