Convertible & Non-Convertible Debentures: Key Differences
Debentures can be categorised based on their transferability, redeemability and convertibility. There are two types of debentures on the basis of convertibility – convertible and non-convertible debentures.
In this article, you will go through fundamental differences between convertible and non-convertible debentures. Keep reading further to have a better understanding of them.
What Is Convertible Debenture?
Convertible debentures are debt instruments in which investment is made for a long period of time. They are called convertible as these can be converted into equity shares after a specific period of time. The right to convert these lies primarily with the shareholders but sometimes also with the issuing company. Convertible debentures have tax benefits over interest paid and have a lower interest rate than the other debt instruments. Depending on both parties, they can be optionally, partially, or fully convertible.
Fully Convertible Debentures: These debentures are fully converted into equity shares after a specific period of time, as mentioned in the agreement. After conversion, debenture holders become shareholders of the company.
Partially Convertible Debentures: Partially convertible debentures, as the name suggests, a certain portion of these debentures are partially converted into equity shares upon exhaustion of the specified duration. Rest of the debentures remain reclaimable as per their maturity period. As this conversion leads to lower equity capital, this is not preferred by many investors.
Optionally Convertible Debentures: In case of optionally convertible debentures, a company issues debt security to raise funds in return of which the company pays interest to the investors till time of maturity.
What Is Non-Convertible Debenture?
Non-convertible debentures are financial, fixed-income instruments which do not have the option to get converted into equity shares upon maturity. Generally well-established companies issue these to public to raise long-term capital. Non-convertible debentures have advantages such as a higher rate of interest, high returns, low risk, liquidity, and tax benefits. These have a fixed maturity date and interest, which can be paid monthly, quarterly, semi-annually, or annually depending upon the contract.
There are usually two kinds of non-convertible debentures:
Secured Non-convertible Debentures
These non-convertible debentures are backed by assets of the issuing company.
Unsecured Non-convertible Debentures
These non-convertible debentures are not backed by any assets of the issuing company, rather depend upon its creditworthiness.
Convertible Debentures vs Non-Convertible Debentures: Key Differences
Now that you have read through the two types of debentures go through the following table discussing the differences between convertible and non-convertible debentures to have a clearer concept.
| Parameters | Convertible Debentures | Non-Convertible Debentures |
| Conversion | Can be converted into equity shares partially or fully after a specified time. | Cannot be converted into equity shares until maturity |
| Types | They can be partially or fully convertible depending upon the agreement at the time of issuing. | These can be secured or unsecured depending on if there is collateral or asset to back these up. |
| Interest rate | Have a lower rate of interest as these are convertible into equity. | Have a higher rate of interest when compared to convertible debentures. |
| Value on maturity | The value upon maturity depends on the stock price of that company during that time. | The value remains the same till the maturity period, and the investors earn a steady return. |
| Dependence on market | If the market goes down, the debenture holders have the option to convert those into equity shares. | During the bad market condition, debenture holders have no option but to wait till maturity to get the returns. |
| Debenture holders | Convertible debenture holders are investors as well as shareholders of that company. | Non-convertible debenture holders are the only investors of that company. |
| Risk rate | Less risk as these are convertible into equity shares. | Higher risk as the investors have to wait till maturity to receive a return on their investment. |
Frequently Asked Questions
Are debentures assets or liabilities?
Considering that debentures are financial debt instruments and come under the secured loan head of the company, these are held as long-term liabilities.
Which entities are eligible to issue debentures?
Both private and public limited companies can issue debentures; sometimes the government also issues debentures to the public to raise funds. However, sole proprietorships, partnership firms and individuals are not eligible to issue debentures.
How is a bond and a debenture different from each other?
Bonds and debentures both are debt instruments. However, they are different from each other on the risk parameter. Bonds have collateral or security assets, but debentures usually do not have any collateral.