Debentures are popular debt instruments that a company issues to raise capital from the public for conducting its business operations. There are different debentures and you can categorise them on the basis of redeem ability, transferability and convertibility. On basis of convertibility, they are two types i.e., convertible and non convertible debentures. In this article, we will discuss the difference between convertible vs non-convertible debenture.
Convertible vs Non Convertible Debentures
The following table shows the key differences between convertible vs non-convertible debenture.
|Parameter||Convertible Debenture||Non-Convertible Debenture (NCD)|
|Definition||The company can convert them fully or partially into equity shares after a specific period||The company cannot convert them into equity shares of the company|
|Types of Debentures||Partially Convertible Debentures – only some portion of debentures are convertible into equity shares. |
Fully Convertible Debentures – they are fully convertible into equity shares on the maturity period.
|Secured NCD – they are backed by the company assets. Also, If a company defaults on payment, investors can claim by liquidating its assets.|
Unsecured NCD – they are not backed by any collateral. Therefore, in case of default, investors have to wait till they receive payment.
|Rate of Interest||They have a lower interest rate than NCD since they can be converted into equity shares||They have a higher interest rate than convertible debentures|
|Maturity Value||The maturity value of these debentures depends on the company’s stock price at that time. A high stock price will give higher returns, while a low stock price will give lower returns||The maturity value of these debentures remains the same where the investors will receive returns on maturity|
|Market Conditions||During bad market conditions, the debenture holders have an option to convert into equity shares||During bad market conditions, the debenture holders have no option to convert and also wait till the maturity for redemption|
|Status||The holders of convertible debentures enjoy the dual status of creditor and also shareholder (owner) of the company.||The holders of non-convertible debentures are only the creditors of the company|
|Risk||They are less risky since you can convert them into equity shares||They are riskier than convertible debentures as you have to hold until maturity to receive payments.|