November 14, 2025
4 mins read
If you want an investment that acts like a loan but can also become stock, convertible debentures may be right for you. These are long-term debt papers. They can change into company shares after some time. This sounds great, but it is complex.
A simple bank deposit just earns interest. That is all. A convertible debenture is different. It is easier to sell if you need cash. It pays you an income. It also gives you a chance to profit from stock growth. People often call this a "hybrid instrument." You get the safety of debt. You also get the pull of future stock profit.
Think of this as a bridge. It connects stability and growth. But you must read the rules carefully before you cross it.
To understand this, let's break it down into steps.
First, the company sells these debt papers. They often promise to pay a fixed interest. That is the debt part. It is simple and sure.
Then comes the change. After a set period, you can change them into company shares. The rate and price for this swap are set when you buy them. You won't have to guess later.
Finally, the end date. If you do not change them to stock, you can hold them until the end. You will then get your original money back. That is your safety net.
Here is a quick example: You buy ₹1,000 in debt paper. It pays 6% yearly. After three years, you can swap it for shares at ₹50 each. If the stock goes over ₹50, the swap is good. If not, you still got the interest money.
These change completely into shares when the time comes. They grow the company's total stock quickly. They are often used by newer firms. These firms may not have strong past results. They seek flexible ways to raise money.
Here, only a piece of the debt changes into stock. The rest stays as debt. These are used for medium growth in stock. They keep a stable balance of debt and stock. Established firms that need planned money often use them.
The swap rates are set for both types when they are first sold. Fully convertible ones count as stock. Partly convertible ones are counted as both until the swap happens. Each type helps companies raise money for a different goal.
Conversion Price: This is the preapproved price. It is the amount required to convert the debt into stock. It is common for this price to be established by market conditions and anticipated appreciation of the stock.
Conversion Ratio: This number indicates how many shares you receive for each debt instrument which is converted. It determines the magnitude of future ownership.
Coupon Payment: These instruments pay interest at prescribed intervals. The interest rate will be less than a conventional loan. This is because the conversion option itself has value.
Convertible Value: This indicates the current market value of the stock that would be received now. This is used to gauge whether it would be a good decision to convert the debt.
Timing of Conversion: This is the time frame that you can make your conversion. The time frame is generally between 1 to 5 years depending on the actual terms of the security. If you do not make the conversion during this period, you will not be able to make the conversion to stock.
Market Price: This is the current market price of the debenture today. The market price will be based on its debt value and its future stock conversion option value.
Income: You get a fixed interest payment. You also get the chance for stock price growth by swapping later.
Risk Management: This tool is safer. Investors can choose not to swap if the stock market is doing poorly.
Liquidation Preference: If the company shuts down, debt holders get paid before stock owners.
Capital Appreciation: If the stock price goes up, the value of your investment rises. You also keep getting interest payments.
Equity Risk: If you swap to stock and then the price falls, your investment loses value.
Default Risk: Many debentures are not secured by assets. If the company cannot pay its debts, the risk of loss goes up.
Priority of Recourse: In a shutdown, these may be paid after other loans. This lowers the amount you can get back.
In India, convertible debenture has become very common. It gives companies a way to raise cash. It also lets them wait before giving up ownership. Investors get interest income. They also get the chance for profit from stock growth.
SEBI sets the rules for this setup. This ensures clear rules and protects the investor. It gives the company a flexible money option. It gives the investor some safety and a chance for high returns.
Now that you know what is a convertible debenture, let’s try to understand the differences between convertible and non-convertible debentures:
Feature | Convertible Debentures | Non-Convertible Debentures |
Conversion | The debenture can be changed into equity shares. | Cannot be converted into equity shares. |
Interest Rate | Lower, due to conversion option. | Higher, as there is no conversion feature. |
Maturity Value | Linked to equity share price. | Fixed maturity value. |
Risk | Lower, as there is potential equity upside. | Higher, as there is no equity conversion option. |
Investor Status | Holds dual status as creditor and shareholder. | Remains a creditor only. |
So, what are Convertible Debentures simply put? They are mixed tools. They sit between bonds and stocks. You get interest like a loan. You later get the choice to become an owner.
They are not without risk. They are not right for everyone. Before you think about buying them, check the company's health closely. Look at the swap terms and the wider market. Only then will the full picture be clear.
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Convertible debentures can be traded in the secondary market, allowing investors to sell them before maturity. Additionally, conversion into equity can provide further liquidity.
The primary risk involves share price volatility. If the equity share price falls below the conversion price, the investor may incur a loss upon conversion.
Convertible debentures are ideal for investors seeking fixed income with the potential for equity gains. However, they may not be suitable for conservative investors due to the associated market risks.
No. While they are less risky than stocks because of their bond floor, convertible bonds still carry risks such as company default, lower interest income, and the possibility that conversion never becomes profitable.
Convertibles have characteristics of both bonds and stocks, which can help improve a portfolio's overall risk-adjusted returns (see Exhibit 1). The bond component provides income potential and reduced volatility, derived from the stated coupon and maturity and the claim to principal.
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