There are various instruments through which companies can raise capital from the investors and the public at large. While equity shares and debentures rank amongst the most popular instruments, the Companies Act, 2013 also authorises other lucrative instruments like Optionally Convertible Debentures (OCDs) for raising capital. Let’s see what are Optionally Convertible Debentures and how can companies issue Optionally Convertible Debentures.
As the name suggests, optionally convertible debentures are primarily the debt instruments that allow companies to raise capital from investors by initially issuing debentures as debt instruments. However, these debentures are not normal debentures as the investors have the option to convert these debentures into shares in the future. The price at which the debentures will get converted into equity shares can either be decided at the time of issue or decided at the time of conversion. Till the debentures are converted into equity shares or they achieve maturity, the investors receive interest as per the terms of issue of the debentures.
Following are some of the legal provisions for issue of optionally convertible debentures as highlighted under the Companies Act, 2013:
Apart from the above sections, the following rules also become applicable in case of the issue of optionally convertible debentures:
Here’s the detailed process for issuing optionally convertible debentures in India:-
Optionally convertible debentures are a welcome instrument for both the companies and the investors at large. Here are some of the key benefits of optionally convertible debentures for both the stakeholders:
Benefit for Companies: The preservation of ownership is an important aspect for most founders and promoters. Optionally convertible debentures allow existing shareholders to issue further capital without diluting the equity. During funding winter, optionally convertible debentures come in handy as companies can raise capital through debt and dilute equity in the future when the valuations go high and market conditions improve.
Benefit for Investors: Optionally convertible debentures benefit investors alike as they reduce their overall investment risk. The option to convert debentures lies with the investors. Therefore, if they find an investment risky, they can go ahead with OCDs whereby they can hold their stake as debt investment. If they find the environment conducive or feel that the company has become stable and has good growth prospects, they can convert their stake into equity as per the terms of the issue.
Following are the complete details relating to the issue of optionally convertible debentures in India. For more information and assistance, feel free to contact the ASC Group.
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