Convertible debentures give the debenture-holders the right (option) to convert them into equity shares on certain terms. The holders are entitled to a fixed income till the conversion option is exercised and would share the benefits associated with equity shares after the conversion. The operational features of convertible debentures in India at present are as follows.

All the details about conversion terms, namely, conversion ratio, conversion premium price and conversion timing are specified in the offer document prospectus. The companies can issue fully convertible debentures (FCDs) or partly convertible debentures (PCDs). The number of ordinary shares for each convertible debenture is the conversion ratio. The conversion price is the price paid for the ordinary share at the time of conversion. Thus, conversion ratio equals par value of convertible debentures divided by the conversion price. The conversion time refers to the period from the date of allotment of convertible debentures after which the option to convert to be exercised. If the conversion is to take place between 18-36 months, the holder will have the option to exercise his rights in full or part. A conversion period exceeding 36 months is not permitted without put and call options. The call options give the issuer the right to redeem the debentures bonds prematurely on stated terms. The investor has the right to prematurely on them back to the issue on specified terms. In addition, compulsory credit rating is necessary for fully convertible debentures.

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Posted by: andy

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