What Is Compulsory Convertible Debentures (CCD)?
A mandatory convertible debenture (CCD) is a kind of bond that must be converted into stocks within the specified date. It is considered a hybrid security because it is neither a pure bond nor an investment. Let’s read What Is Compulsory Convertible Debenture!
A debenture is a long-term, medium-to-long-term credit security that a firm issues to borrow money at a fixed rate. In contrast to most corporate bonds that are investment grade, however, they aren’t secured by collateral. It is only secured by the total trust and credit of the company that issued it.
Important Points
- A convertible debenture with a compulsory conversion clause is a bond that needs to be converted into stock at maturity.
- For businesses, it permits the repayment of debt with no spending cash.
- For investors, it provides an interest-free return and, in the future, the ownership of shares in the company.
Unlocking the Secrets of CCD Trading
A debenture can be found in two types: convertible and non-convertible
- A non-convertible debenture can’t be changed into shares in the equity of a company issuing it. Instead, holders of debentures receive regular interest payments and receive their principal back at the expiration date, as do many bondholders. The interest rate attached to these bonds is greater than that of convertible debentures.
- The convertible debentures can be converted into the company’s equity after an agreed-upon period. This is an apparent advantage, so investors are prepared to accept a lower interest rate for buying convertible debentures.
The CCD is a convertible debenture. It differs in that its owner is required to take stock of the company once it matures rather than having the option of accepting cash or shares.
Debenture holders are only entitled to vote for shareholders once their debentures convert into shares.
For businesses, the mandatory conversion of debentures into equity can be a method to pay off a debt without the need to use cash. Its payment consists of the principal repayment and interest.
The issuer determines the mandatory convertible bond’s proportion of its conversion when the debenture becomes available. The conversion ratio reflects the number of shares that a debenture can convert into, and it can be expressed in bonds or based on a per centum (per 100) basis.
Compulsory Convertible Debentures: Demystifying the Trading Process
CCDs are typically regarded as equity but are structured more like debt. The investor could exercise a put option, which entitles the company issuing it to purchase shares back at a set price.
Contrary to debt-only issues like corporate bonds, CCDs cannot present a danger to credit for the entity issuing them as they eventually convert into equity. CCDs can also help alleviate some of the pressure that an equity issue could put on the underlying stock because they aren’t immediately converted into shares.
Benefits of issuance of CCD in favor of the Company and Investor
Benefits for the Company
- Equity is not subject to dilution at the beginning because conversion takes place at a later date.
- There is no requirement to increase capital authorized before issue since CCD is part of debt up to the conversion time.
- There is no obligation to pay interest for CCD; CCD can be free of coupons, too.
- Only voting rights for CCD holders once they have been converted or default occurs.
- There is no requirement to follow the strict External Commercial Borrowing (ECB) guidelines when investing from non-residents of the country, as CCD will be protected under Foreign Direct Investment (FDI).
Benefits for the Investor
- CCD gives them liquidity advantages over equity in the event of liquidation.
- CCDs can be transferred.
- The period for conversion of CCD can last up to 10 years.
- The formula and price for conversion are fixed at the date of issue.
- Investments for non-residents are easy through CCD since FDI rules are in place.
Conclusion: What Is Compulsory Convertible Debenture
In recent years, CCDs have gained significant attention from start-ups due to their hybrid character and ease of compliance. They are favored over other instruments since they allow flexibility for the company and the investor. However, selecting the best type of instrument will depend on other factors related to the company and the Investors’ intentions. We hope you understand What Is Compulsory Convertible Debenture.