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Definition: Partially Convertible Debenture
Partially convertible debentures are the debentures part of which can be converted into equity at a price and the time specified by the issuer at the time of issuing such instruments. It may also be defined as a financial instrument that may be converted into a different security of the same company under various specified conditions. The option of this conversion may sometimes be optional, i.e. at the discretion of the investor or sometimes it may be compulsory as well. Generally, in these types of financial instruments no cash is involved.
Since, the same security is converted into equivalent equity stocks hence no cash is involved. Although, the face value of bond on exercising this option reduces. The price at which the issuer company provides equity stocks to its bond holders under these instruments is known as conversion price and the extent to which this option can be used for a particular bond is known as conversion ratio. The price at which the issuer offers the investors to convert their bond to equity stocks is generally more than the current market price of the stock.
This so happens because if for example an issuer issues a 20 year PCD bond. But the conversion option has to be applied only at the end of 10 years. Then, if the current market price stock of that company is Rs. 50, then it I assumed that according to various growth models, in 10 years the market value of stocks is definitely going to increase. That’s why the conversion price is placed at the value greater than the market value. The bonds with less attractive yields use such kinds of options to attract the investors towards these kinds of debt instruments. Hence, convertible options are basically attached to “sweeten the offering”. In case of fully convertible bond, the entire face value of the bond can be converted to equity stocks at conversion price.