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CS Executive · Capital Market and Securities Laws · Basics of Capital Market

A listed company gives its debenture holders the option to exchange each debenture for 10 equity shares after three years at their discretion. Compared with a non-convertible debenture, what is the key feature of this instrument?

The instrument is a hybrid: it carries debt features such as interest and a repayment claim until the holder chooses to convert it into equity shares. The option rests with the holder, so it is not equity from issue, nor compulsorily converted by the company.

  1. AIt converts into equity only at the company's option, with no choice to the holder
  2. BIt is a hybrid instrument carrying debt features until the holder opts for conversion into equityCorrect
  3. CIt is an equity instrument from the date of issue
  4. DIt carries no interest because conversion is the only return

Explanation

An optionally convertible debenture behaves like debt, with interest and repayment claims, until the holder exercises the conversion option into equity. Hence it is a hybrid. The option lies with the holder, not the company, and it is not equity at issue. Interest is not necessarily absent.

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