DISTINCTION BETWEEN FULLY CONVERTIBLE AND PARTLY CONVERTIBLE DEBENTURES :

Characteristics	Partly convertible debentures	Fully convertible debentures
Suitability	Better suited for companies with established track record	Better suited for companies without established track record
Capital base	Relatively lower equity capital on conversion of debentures	Higher equity capital on conversion of debentures
Flexibility in financing	Favourable debt equity ratio	Highly favourable debt equity ratio
Classification for debt- equity ratio computation	Convertible portion classified as ‘equity and non-convertible portion as ‘debt’	Classified as equity for debt-equity computation
Popularity	Not so popular with investors	Highly popular with investors
Servicing of equity	Relatively lesser burden of equity servicing	Higher burden of servicing of equity

 

In the case of partly convertible debentures, debenture redemption reserve has to be created for 50% of the face value of the non-convertible portion. The facility of buy-back is also permissible in respect of non-convertible portion of debentures.

In contrast no reserve for debenture redemption is required for fully convertible debentures nor are buy-back arrangements permissible.

Sometimes companies issue zero interest fully convertible debentures. In this case, investors are not paid any interest till the date of conversion or upto the notified date, after which they are converted into shares. For the investor the investment amount is lower and cost of conversion also is less. Further this helps them as a means of tax planning since interest which is otherwise taxable is not paid. The capital appreciation at the time of conversion is treated as capital gains where tax rate is less. Companies also prefer this instrument because they are able to avoid payment of interest.