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Concept of debentures
The important features of the debentures are:
A debenture has a face value which is the amount paid per
debenture. This face value may be divided into different parts say Part A, Part
B, recto understand the concept we take an example of a debenture of face value
ofRs.200 with Part A ofRs.20, Part B ofRs.90, and Part Cof Rs.90.
These different parts of a debenture have different
terms with respect to
conversion of redemption.
For the typical debenture under consideration, the coupon
rate is 14 per cent. Part A ofRs.20 will be converted into one equity share on
allotment at a premium ofRs.10 per share. Part B is converted into two shares at
a premium ofRs.35 per share, one year after allotment. Part C remains as a debt
and is redeemed at the end of the sixth, seventh and eighth year; from the date
of allotmentin three equal installments and a premium of five rupees is payable
along with the first installment.
The idea of the scheme is quite simple. During the period
of project implementation, the company is not in a position to serve the equity
by way of dividends, as it does no tearn any profits. On the other hand, it can
capitalize the interest during this period and claim depreciation. During this
period, most of the money is in the form of debt. The date of conversion is
fixed to coincide with the expected date of project completion. After the second
conversion,the company retains a cheap debt at 14 per cent per annum.The shares,
issued at premium do not increase the company's equity size substantially. The
investor, on the other hand, is thrilled to receive the
companies' shares and quite often sells offt he part C at
a discount.
Part C is called the non-convertible part of debenture or
Khokha. The non-convertible debenture often comes with a detachable warrant,
which has a validity period. Within that period, at any time, the company can
offer the warrant holders equity shares at a predetermined price. This war-rant
can be separately traded on the stock exchange and is not related to the
non-convertible debentures.
The debentures can be independently traded on the
stock exchanges for a price
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