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CMA Intermediate · Financial Management and Business Data Analytics · Sources of Finance

Sundaram Textiles issues 9% convertible debentures of ₹1,000 each. Each debenture is convertible into 20 equity shares at the option of the holder after three years. Which statement best describes why such an instrument is called a hybrid security?

A convertible debenture is hybrid because it pays fixed interest like debt while giving the holder the option to convert into equity shares. It therefore combines features of both debt and equity, unlike pure equity or pure debentures.

  1. AIt carries fixed interest like debt and also gives the holder the option to become an equity shareholderCorrect
  2. BIt pays dividends only when profits are earned and has no maturity
  3. CIt is issued only to venture capital funds at a discount to face value
  4. DIt is repaid only on winding up of the company

Explanation

A convertible debenture combines a debt feature (fixed interest, repayment claim) with an equity feature (right to convert into shares). That mix makes it hybrid. The options describing profit-linked dividends or repayment only on winding up describe equity or preference-type features, not this combination.

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