Difference Between Convertible and Non-Convertible Debentures

Debentures, along with bonds, are some of the most popular debt instruments. When companies, and sometimes even the government, wish to raise public funds, they issue this instrument known as debentures.

Debentures are of different types, which are categorised based on convertibility, redeemability, and transferability. Based on convertibility, debentures are then further classified into the following two types – convertible and non-convertible debentures.

A partially convertible debenture is another lesser-known debenture type. In this type of debenture, the company that issues the debenture decides the percentage of the debenture, which may or may not be converted into company stocks.

Further in this article, we will look at the difference between convertible and non-convertible debentures. The comparison can be drawn based on different parameters, which are discussed below.

We can differentiate between convertible and non-convertible debentures on the following basis:

Six Main Differences Between Convertible and Non-convertible Debentures

Similarities Between Convertible and Non-Convertible Debentures 

Besides the difference between convertible and non-convertible debentures, the similarity between convertible and non-convertible debentures is that they both are a kind of debt instrument. Both of these debentures act on the same line like a bond. Generally, companies or sometimes the government comes with debentures. If they want to borrow money from the public, they usually issue debentures.

Also, some debentures are a mix of convertible and non-convertible debentures. They are known as partially convertible debentures. In such debentures, the issuing company can command the percentages of the debentures, which may or may not be converted into company stocks.

Which is Better? Convertible or Non-Convertible Debentures?

If you understand the difference between convertible and non-convertible debentures, carefully assess your investment goals and financial portfolio before making any investment. Generally, finance experts suggest that it is best to put 5 to 10% of your portfolio in the convertible debentures and invest the remaining in the traditional bonds and other investment options.

The convertible debentures have lower interest rates than non-convertible debentures as the holders have the advantage of converting them into equity shares. But though the non-convertible debentures have a higher interest rate, they are considered risky than convertible debentures and bonds.

Hence a safer option for investing would be convertible debentures. But, if you want to have higher profits and are willing to take the risk, then non-convertible debenture is the right choice for you.

Importance of Debentures

Debentures are helpful in a lot of ways and can become one of your potential investments. Some of the significant advantages of debentures are as follows:

1. Helpful in Unstable Market Conditions: In depressed market conditions, debentures play an essential role in providing a reliable source of finance for a company and are beneficial to the investors.

2. Beneficial for the Company Issuing Debentures: Debentures provides long-term finance on easy and cheap terms. The cost of borrowing money through debenture is minimum as the cost of debt is lesser compared to the cost of equity or preference shares as the interest is tax-deductible.

3. Mobilisation of Investments: Debenture helps in the mobilisation of savings from the public, particularly from those investors who are opposed to the idea of taking risks.

4. The Compulsion of Creation of Debenture Redemption Fund in Case of any Misfortunes, Thus Reducing the Risks of the Holders: Debenture issuing company is obliged now to create a debenture redemption fund to protect the interest of debenture holders.