What are convertible debentures meaning?

Welcome to the article on convertible debentures in this article we will learn what are convertible debentures and how does it help the organization issuing the debentures as well as the investors who are investing in them. 

Convertible debentures meaning:- Convertible debentures are one of the ways to attract investors and ensure the success of its debt issue let us understand how so the first question is what is convertible debentures? so a convertible debenture is a type of debenture that can be changed into a specified number of ordinary shares at the discretion of the owner of the debenture.

 So let us take a quick example to understand the concept of convertible debentures so let's say that a company issues in LAC 12% convertible debentures and these debentures are of rupees 100 each and each of these debentures is convertible into two equity shares of rupees 50 each after two years from the date of allotment so basically at the time of issue of these convertible debentures the company will receive a cash inflow of 10 lakh multiplied by 100 so 10 lakh multiplied by 100 which is equal to 1000 lakh rupees now just for the sake of understanding the rupees 10  lack is equal to rupees 1 million this in case you want to understand this in Millions.

Now, these debentures are going to be converted into equity shares after two years so till the first two years the owner of the debentures is going to get 12% interest on these dentures so basically overall the organization will have to shell out 1,000 lakh multiplied by 12% which will be equal to 120 lakh rupees per year this is the interest.

Now after 2 years the owner can exchange one debenture for two equity shares of a piece of the so the price is locked prices log at the beginning now if the market value is more than 50 rupees at the end of 2 years the owner of the debenture is already in profit he already has made capital gains and then the owner can continue to remain invested in those shares and the price as and when it increases his capital gain continues to increase also the shareholder will now be entitled to get dividends in these shares which he owns so as you have noticed the most attractive feature of the convertible debentures are that it provides a fixed income at the beginning as well as a chance to have capital gains associated with the equity shares afterward.

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