Why Do Investors Ask for Convertible Debentures?
Convertible debentures are a popular choice among investors due to their unique benefits. These long-term debt instruments pay interest and can be converted into equity at specified times, offering security and potential for growth.
Key reasons why investors opt for convertible debentures include:
Fixed Interest Income: Investors receive regular interest payments, ensuring a steady income stream.
Equity Participation: The option to convert debentures into equity allows investors to benefit from stock price appreciation.
Downside Protection: If the companyโs share price declines, investors can hold the bonds until maturity, limiting potential losses.
Priority in Liquidation: Convertible debenture holders are prioritized over other shareholders in the event of liquidation.
Tax Benefits: Interest payments on convertible debentures are tax-deductible, providing significant tax savings for companies.
Hybrid Investment: Combines the security of debt with the growth potential of equity.
For companies, issuing convertible debentures is a flexible fund-raising strategy, especially for startups. It allows for market-driven valuation at a later date and offers a favorable debt-equity ratio. Fully and partly convertible debentures cater to different investor preferences, with fully convertible debentures being particularly popular.
Investing in convertible debentures offers a balanced approach, combining the security of debt with the potential of equity. This hybrid investment is ideal for those looking to minimize risk while maximizing returns.
