What is a Compulsory Convertible Debenture?

It is a popular investment instrument issued by a company in the form of a debt against any investment by the investor. CCD is convertible into equity shares of that company within a specified time i.e. not later than 10 years of issuance of the debenture. Students face difficulty in writing debenture assignments so they take professional Debenture assignment help.

What are the Advantages of Compulsory Convertible Debenture?

As per the guidelines of RBI (Reserve Bank of India), the compulsory convertible debentures should be taken as equal to the equities for all purposes related to the financial purposes. But these are not considered as part of the share capital of the company unless they are converted into equities. There are various advantages associated with CCD. Some of these are mentioned below:

  • Debt Security: One of the features which make the CCD secure is that it is converted into equity at a specified time. This feature enables more and more investors to invest in CCD. When a company grows, the CCD is converted into equity and the investor automatically becomes a shareholder in the company.
  • Pricing and Discount: Normally, a CCD is purchased at a discounted value. This eliminates the worries of fixing the portfolios immediately. The value increases in the next round of valuation.
  • Rate of Interest: For the company, it is beneficial as it has to pay a lower rate of interest to the investor as the CCD was issued at discount. The non-convertible debentures are paid a higher rate of interest. When the company’s taxable income is calculated, the tax paid is deducted so reduces tax payable.
  • Preferential Payment: Any holder or investor of a CCD has the full right of preferential payment because the CCDs are issued as a debt rather than equity unless converted. They are hybrid instruments and occurs in two forms; one in the form of debentures as a debt instrument and in the form of equity after conversion.
  • Cap Table: In the traditional form of investment, the investors can face immediate dilution upon receiving investment. This is not the case in CCD as the dilution is deferred till the date the CCDs are converted into equity.
  • Debenture Reserve: For non-convertible debentures, there are several formalities like debenture redemption reserve, debenture trust deed, the appointment of debenture trustee etc in order to make the payment secure at the redemption time. No such things are required for CCD.

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