Convertible vs Non-Convertible Debentures - Key Differences Explained

Convertible vs Non-Convertible Debentures - Key Differences Explained

Looking for a reliable investment option beyond stocks? Debentures—especially convertible and non-convertible debentures (NCDs)—offer fixed returns, moderate risk, and portfolio diversification. But what’s the difference between them, and which one suits your financial goals? 

Consider a company looking to expand its operations. It might issue debentures to raise capital, promising investors a fixed interest income over a period. But some debentures can be converted into shares of the company later, while others cannot. This difference shapes the risk, reward, and role of the debenture in your portfolio.

A bond or debenture is a loan an investor gives to a company or government, which pays interest periodically (called the coupon rate) and returns the principal on a fixed maturity date. Its face value is the amount the investor will get back at maturity, usually ₹1,000 or ₹10,000 per debenture. Bonds and debentures provide fixed income but vary in features such as convertibility, security, and tenure.

Let’s explore convertible vs non-convertible debentures and understand how they work, how they differ, and which is right for your investment goals.

What are Convertible Debentures?

Convertible debentures are a type of debenture that gives you the option to convert your investment into equity shares of the company after a certain period. This means that as an investor, you start by lending money to the company, receiving fixed interest payments just like a typical bondholder. However, depending on your preference and market conditions, you can later convert your debentures into stock, thereby becoming a partial owner of the company.

There are three types of convertible debentures:

• Fully Convertible Debentures: The entire amount converts into equity shares at maturity.
• Partially Convertible Debentures: Only a portion of the debentures convert into shares, while the remainder remains as debt.
• Optionally Convertible Debentures: You have the discretion to convert or not, based on market conditions.

Because of the convertibility option, convertible debentures usually offer lower interest rates compared to non-convertible ones. You’re accepting a bit less fixed income in exchange for the potential upside of share ownership if the company performs well.

What are Non-Convertible Debentures (NCDs)?

Non-convertible debentures (NCDs), as the name suggests, cannot be converted into shares. You lend money to the company, get fixed interest regularly, and your principal (the original amount you invested) is returned at the end of the maturity period. That’s it, no equity, no ownership.

NCDs often offer higher interest rates than convertible debentures to compensate you for the lack of conversion benefits. They are popular among investors seeking stable, predictable income with limited exposure to stock market fluctuations.

There are two types of NCDs:

• Secured NCDs: Backed by the company’s assets for added safety.
• Unsecured NCDs: Not backed by assets, relying solely on the company’s creditworthiness.

NCDs are generally more liquid because many are traded on stock exchanges, allowing investors to buy or sell on the secondary market after issuance.

Convertible vs Non-Convertible Debentures: Key Differences

Here’s a simple table to understand the difference between convertible and non convertible debentures:

Why Does This Matter to You?

Suppose you invest ₹10 lakh in a company’s convertible debenture. You receive, say, a 7% annual coupon—slightly lower than market NCD rates—but after five years, the company’s shares have grown significantly. You convert your debentures into equity shares at a predetermined ratio, potentially increasing your returns beyond those of fixed income. It’s a mix of debt plus equity growth.

On the other hand, if you opt for an NCD offering a 9% interest rate, you enjoy high fixed returns with no exposure to share price volatility. Your principal is safe and redeemable at maturity. This suits investors who prefer steady cash flow without stock market risk.

How Debentures are Traded in India: Primary vs Secondary Market

When companies issue debentures for the first time, they do so in the primary market, where investors subscribe directly to the offering. For example, a business may float a new NCD for 5 years at a 9% coupon, and investors can apply through Bondbazaar.

After issuance, debentures get listed on exchanges such as NSE or BSE, allowing investors to trade them in the secondary market. Here, prices fluctuate based on interest rates, the company’s credit rating, and overall market sentiment. This market provides liquidity, so you aren’t forced to hold till maturity if you need to exit.

Are Bonds and Debentures the Same?

Though often used interchangeably, the terms bonds and debentures can differ slightly. Bonds, particularly government bonds, are secured by assets or government backing and are considered safer. Debentures are typically unsecured or backed only by the issuing company’s creditworthiness.

In India, debentures issued by companies (corporate debentures) often come in convertible and non-convertible variants and are traded actively on Bondbazaar. This platform offers a wide selection of bonds and debentures (over 10,000 securities), with the ease of buying and selling through a real-time trading platform, all regulated by SEBI. It features zero brokerage fees, with payments credited directly to your bank account.

Why Consider Convertible or Non-Convertible Debentures?

Choosing between the two depends on your financial goals, risk appetite, and investment horizon.

• Convertible debentures are suitable for investors seeking growth potential with some downside protection. They combine fixed returns initially and possible capital appreciation through share conversion.
• Non-convertible debentures appeal to those seeking a stable and predictable income with minimal exposure to equity markets.

Things to Keep in Mind Before You Invest

1. Credit Rating – Always check if the company has a high rating (AA or AAA) from agencies like CRISIL or ICRA. It indicates whether the company is financially stable.
2. Issuer’s Reputation – Stick with known companies that have a good track record.
3. Interest Rate vs Risk – Higher interest rates are tempting, but they often come with higher risk. Decide what’s more important to you.
4. Maturity Period – Choose a tenure that matches your financial goals, don’t lock your money longer than needed.
5. Market Conditions – During bad times, convertible debentures may offer better flexibility.
6. Taxation – Interest from debentures is taxed according to your income tax slab. Selling early may also attract capital gains tax.

Conclusion

Understanding the difference between convertible and non-convertible debentures helps you choose the right one for your financial goals. Convertible debentures offer the flexibility to become a shareholder, but they also come with stock market risks. Non-convertible debentures (NCDs) offer fixed, steady returns and are ideal for individuals seeking a reliable income with lower risk. Whether you prefer safety or growth, both options have a role to play in your investment portfolio. 

To take the next step in building a diversified portfolio with convertible or non-convertible debentures, explore Bondbazaar’s real-time trading platform. With over 10,000 bonds across government securities and corporate issues, zero account charges, and seamless buy-sell options at your fingertips, investing has never been easier or more transparent. 

Visit Bondbazaar today to find debentures that align perfectly with your financial goals and risk appetite.

Frequently Asked Questions

Q1. What is the main difference between convertible and non-convertible debentures?

A: Convertible debentures can be converted into equity shares of the company, while non-convertible debentures cannot. NCDs offer fixed income and no ownership.

Q2. Which is better: convertible or non-convertible debentures?

A: It depends on your goals. Convertible debentures offer equity upside, while NCDs provide stable, predictable income.

Q3. Are NCDs a safe investment in India?

A: Secured NCDs issued by highly rated companies (AA/AAA) are relatively safe and suitable for conservative investors seeking fixed returns.

Q4. Where can I buy debentures in India?

A: You can invest in convertible or non-convertible debentures on Bondbazaar with zero brokerage and real-time access to the bond market.