Companies issue debentures to obtain funds in order to run their business or to take advantage of tax. At the time of conversion, if the company has diluted stock then the company issue more shares to reduce its cost of capital and equity share. For this, the companies issue different types of debentures. In this article, you will come to know about what is Compulsory Convertible Debentures.
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What is Compulsory Convertible Debentures
Before discussing the Compulsory Convertible Debentures you should know about the debentures. Debentures are debt instruments issued by companies in order to raise finances. As the name suggests, Convertible Debentures, it is not a loan. It is convertible, which means it is converted into equity shares of the issuing company at a predefined rate.
So, Compulsory Convertible Debentures are long-term debentures issued by companies that can be converted into equity shares of the issuing company at a predetermined rate for a specific period of time. Compulsory Convertible Debentures are also called CCDs. As you have been familiar with What is Compulsory Convertible Debentures, let’s discuss some of its key features.
What are the Key Features of Compulsory Convertible Debentures?
Convertibility: CCDs have a convertibility feature which means the debenture can be converted into equity shares at a predetermined rate for a specific period of time.
Conversion Price: The debenture holder is allocated actual shares by the company. The price of this conversion depends upon the market price, the company’s performance, and others.
Conversion Ratio: This ratio determines how many equity shares each CCD can be converted into. In the CCD issuance terms, this ratio is mentioned.
Market Value: This feature depends upon the investment and conversion value of the debenture. Actually, it is the market value attached to the debenture for conversion.
Conversion Timing: The companies set a specific period of time after that the investors can convert their debenture into shares.
Number of Conversions: The investor can convert more than one number of debentures. The amount to be converted is defined in terms of the number of equity shares per conversion rate.
Advantages of Compulsory Convertible Debentures
For businesses, dealing with Compulsory Convertible Debentures is profitable as it is the quickest and most feasible way to raise funds. Furthermore, a company can get a profit and can plan its growth.
The advantages that an investor and the company can get from Convertible Debentures are:
- In the case of the company’s liquidation, the convertible debenture holders will receive the payment at the very first.
- It provides flexibility to the investor and the company. The company can secure its capital and as the investors have equity participation, they can get benefit through future growth.
- Investors can get tax benefits which may increase their attractiveness toward investment options.
- Options are available for the investors to hold on to their bonds if the stock prices decline.
- As compared to other debentures, CCDs have low risk because they have a conversion option. If there is any increase in the company’s share price, the investors can benefit.
As the pros and cons of everything exist so the investor should also keep in mind the disadvantages of Compulsory Convertible Debentures to get a clear picture.
Disadvantages of Compulsory Convertible Debentures
The disadvantages that must be in an investor’s mind are:
- If the stock prices of the company are reduced after conversion, the investor has to bear all the loss of money.
- If the company defaults, then it will not pay the actual amount to debenture holders. So, the debenture holders will have to bear in this case.
- As this debenture is converted into equity shares, it is subjected to various conditions and timelines and there is uncertainty associated with these factors.
As you have read the complete article about What is Compulsory Convertible Debentures, it is clear that CCDs are a combination of debenture and equity share. CCDs benefit both the investor and the company. Through CCDs, companies can increase their capital while the investors have the opportunity to become shareholders. CCDs are the best option for individuals who are looking for fixed-interest payments.
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Last Updated on June 4, 2023