Non-convertible debentures are unsecured long-term loans issued by companies as bonds, which pay interest but cannot be converted into equity. Investors receive fixed interest payments and the principal amount at maturity.
Companies issue these debentures to raise capital without diluting ownership. Investors lend money to the company in exchange for periodic interest payments and repayment of the principal at maturity. Unlike convertible debentures, these cannot be exchanged for company shares.
| Type | Description | Example |
|---|---|---|
| Fixed-Rate Debentures | Pay a set interest rate throughout the term | A $1,000 debenture paying 5% annually |
| Floating-Rate Debentures | Interest rates fluctuate with market conditions | A $5,000 debenture with interest tied to LIBOR + 2% |
| Zero-Coupon Debentures | Sold at a discount, no interest payments, repaid at face value | A $10,000 debenture sold for $8,000, repaid at $10,000 |
Companies prefer these debentures because they avoid shareholder dilution and maintain control. They offer lower interest rates than bank loans due to longer tenors. For example, a tech startup might issue $50 million in non-convertible debentures to fund expansion without giving up equity.
Investors favor them for stable returns, especially in volatile markets. Pension funds and insurance companies often hold these debentures for their predictable income streams. According to the Securities and Exchange Board of India, non-convertible debentures accounted for 62% of corporate bond issuances in 2022.
Many confuse non-convertible debentures with preference shares. While both provide fixed returns, preference shares offer voting rights and potential conversion to equity. Debentures are purely debt instruments without equity participation.
Another mistake is assuming all debentures are secure. Non-convertible debentures are typically unsecured, meaning they lack collateral. In case of default, debenture holders rank below secured creditors but above equity shareholders in claims.
In 2021, Reliance Industries issued ₹5,000 crore ($660 million) of non-convertible debentures to refinance existing debt. The debentures had a 10-year tenor with a coupon rate of 6.42%. This move allowed Reliance to reduce its interest burden while avoiding equity dilution.
I analyzed this issuance while working on a financial project. The key advantage was the lower interest cost compared to bank loans, demonstrating why companies prefer debentures for large refinancing needs.
The Reserve Bank of India regulates debenture issuances under the Companies Act, 2013. Issuers must obtain credit ratings from agencies like CRISIL or ICRA. Minimum subscription requirements apply, with at least 25% of the issue size subscribed by qualified institutional buyers.
For more on financial instruments used by non-profits, see this guide.