Non-Convertible Debentures vs. Convertible Debentures: Key Differences Explained

21/09/2024 | 4 Comments

Companies often need extra funds to grow and one of the popular ways they do this is by issuing debentures. A debenture is like a loan that investors give to the company. In return, the company promises to pay interest regularly and return the original amount after a set time. There are generally two main types of debentures – Non-Convertible Debentures (NCDs) and Convertible Debentures (CDs). Read on to learn more about what is a convertible debenture, what is a non-convertible debenture, and the key differences between them.


What is a Convertible Debenture?

A convertible debenture is a type of loan that the company can repay by giving you shares of the company instead of paying back with cash. After a certain period, you get the option to convert your debenture into company shares. By doing this, you can become part-owner of the company. This means that if the company does well, the value of the shares could go up and you earn more profit.


What are Non-Convertible Debentures (NCDs)?

A non-convertible debenture (NCD) is a type of loan that cannot be turned into shares. When you invest in NCDs, the company will pay you regular interest, but you will not own any shares in the company. Once the debenture tenure ends, the company will return the amount you invested. NCDs are simple loans where your only benefit is the fixed interest.

NCDs


Key Differences Between NCDs and Convertible Debentures

Here are the main differences between NCDs and convertible debentures:


Conversion to Shares

You can convert convertible dentures into company shares after a certain time, however, you cannot turn non-convertible debentures (NCDs) into shares.


Risk and Return

Convertible debentures give you interest like a loan, but they also give you the chance to benefit from share price increases if you convert to shares. However, shares are riskier as their value can fluctuate. On the other hand, non-convertible debentures or NCDs are less risky as you get a fixed interest payment.


Interest Rates

Convertible debentures usually offer lower interest rates as you may gain from owning company shares later. However, non-convertible debentures offer higher interest rates as you do not get the option to convert them to shares.


Liquidity

If you convert convertible debentures to shares, you can sell those shares in the stock market easily. Though you can also sell NCDs in the market, they may not be as easy to sell as shares.


Advantages of Convertible Debentures

Here are some significant advantages of convertible debentures:

  • If the company does well, you can convert your debentures into shares and benefit from the rise in share prices.
  • Until you convert them into shares, you can still receive regular interest payments.
  • Convertible debentures offer lower risk than directly buying shares as they also pay interest.


Advantages of Non-Convertible Debentures

Here are the main advantages of non-convertible debentures:

  • NCDs generally offer higher interest than convertible debentures.
  • As NCDs do not convert into shares, your returns are fixed.
  • NCDs are considered safer than convertible debentures as they do not depend on how the company’s shares perform in the stock market.


Convertible Debentures vs. Non-Convertible Debentures: Which One To Go With?

The choice between convertible debentures and non-convertible debentures depends on what you want from your investment.

If you are okay to take risks for the chance to earn more by owning company shares, convertible debentures may be a good choice for you. But if you prefer a steady and secure option with higher interest rates, non-convertible debentures are safer for you.


Also Read : How to Balance Risk & Rewards in Investing


Conclusion

Both these types of debentures, convertible and non-convertible, have something to offer you. However, if non-convertible debentures interest you more, then download the 13Karat app and invest in NCDs right away. With 13Karat, you need only a minimum investment of ₹1 lakh to enjoy a 16.1% annual rate of return.

Without further ado, grab the opportunity!