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| January 7, 2022


It is very natural that a company needs money for a variety of reasons. A company may need money to expand its business, buy new tangible assets, buy new land, or even plan to acquire another company. To do so, a company can take a loan from the bank, issue shares, or borrow foreign investment. A company can also issue debt instruments which are known as debentures. As an investor, when you invest in a debenture, you lend money to the debenture issuer. In exchange, the issuer promises to return your principal amount on maturity, till then the issue will pay you a rate of interest. Debentures are financial instruments that a company issues when it wants to raise long-term capital. Debentures are classified into Convertible Debenture and Non-Convertible Debentures. Let us understand the difference between Convertible and Non-Convertible debentures in brief.

Meaning of Convertible Debentures

Convertible debentures are hybrid in nature. They are partly bond and partly stock. A convertible debenture is a long-term instrument that can be converted into stock upon maturity. There is no primary collateral interlinked to convertible debentures, hence it is usually an unsecured bond or a loan form of financial instrument. Convertible debentures can be further classified into two types; fully convertible debenture and partially convertible debenture.

Types of Convertible Debentures

  • Fully Convertible Debentures
    Fully convertible debentures are a type of convertible debenture where the full value of the debenture can be converted into equity shares, hence called fully convertible debentures.

  • Partially Convertible Debentures
    As the name implies, only some part of debenture gets converted into equity shares.

What about Non-Convertible Debentures?

Non-convertible bonds or debentures are a type of debenture that cannot be converted into equity shares or stocks, hence called non-convertible. The interest rate on non-convertible debentures can be paid either monthly, quarterly, or annually. NCDs also have a fixed maturity date. NCDs are a popular form of investment tool among investors because of their supreme returns, liquidity, low risks, and higher interest rates than convertible debentures. When a company announcesNon-convertible bonds, you can check the company’s ratings, its credibility, and the coupon rate of the NCD for a better return on investment. Non-convertible debentures can be classified into two types; Secured NCDs and Non-Secured NCDs.

Types of Non-Convertible Debentures

  • Secured NCDs
    These types of NCDs are called secured because it is backed by the assets of the company in case the issuer fails to make the payment on time. If a company fails to make the payment on time, the investors can recover their investments by liquidating the issuer’s assets.

  • Unsecured NCDs
    In unsecured NCDs, the investors cannot recover the invested money as there is no assets back-up in case the company fails to make the payment on time. The investors will have to wait until their full principal amount is recovered from the company. However, with higher risk, un-secured NCDs offer higher interest rates as compared to secured NCDs.

Comparison between Convertible and Non-Convertible Debentures

There are various parameters on which convertible debentures and non-convertible debentures offer benefits to investors. Some of them are mentioned below in brief.

  • Conversion
    Convertible debentures can be converted into equity shares by the issuer. On the other hand, non-convertible bonds cannot be converted into equity shares.

  • Interest Rate
    Convertible debentures have lower interest rates since the holder has the benefit of converting the debentures into equity shares. Non-convertible debentures offer higher interest rates that make it a popular choice of investment for investors.

  • Maturity
    The value of maturity is dependent on the stock prices of the company in case of convertible debentures. High stock prices will yield higher returns to investors. On the other hand, the value of maturity is fixed in non-convertible bonds, and the investor will receive fixed returns on maturity.

  • Market Conditions
    In case of risk during bad market conditions, the convertible debentures can be converted into equity shares. While non-convertible debentures cannot be converted into equity shares and can be redeemed only on maturity.

  • Status
    Convertible debentures holders enjoy the dual status, as the investor can be a creditor as well as the owner of the company since convertible debentures can be converted into equity shares. While investors in non-convertible debenture can only be a creditor to the company.

To take care of your NCD investment, Muthoot Finance, India’s leading NBFC is here to offer you the highest levels of corporate integrity and facilitate various banking services across diversified business or individual needs. Invest in Muthoot Finance Non-convertible debentures or Convertible debentures and build a rewarding portfolio that is tailor-made to suit your investment goals. Visit your nearest Muthoot Finance branch or get in touch with our expert team online to know more about our services.

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