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CS Professional · Strategic Management and Corporate Finance · Sources of Corporate Funding

A company issues compulsorily convertible debentures (CCDs) of face value Rs 1,000 that will convert into equity shares after three years. Which feature best explains why such instruments are called hybrid securities?

CCDs are hybrid because they pay fixed interest like debt during their life and then convert compulsorily into equity shares, giving the holder ownership. They therefore combine a debt feature before conversion with an equity feature after conversion.

  1. AThey carry fixed interest like debt but end up as equity ownership on conversionCorrect
  2. BThey give voting rights from the day of issue but never pay any return
  3. CThey are repayable in cash only on the winding up of the company
  4. DThey can be issued only to foreign investors under the FEMA route

Explanation

A CCD pays interest like a debenture during its life and then converts into equity shares, so it combines features of debt and equity. The voting-rights option is wrong because debenture holders have no voting rights before conversion. The other options describe features that CCDs do not have.

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