From the Point of view of Convertibility

Concept First

The classification of debentures from the point of view of convertibility is about what happens to the debenture at the time of redemption. Does the company simply repay the money, or does it give the debentureholder a stake in the company's ownership? This distinction affects both the investor's choice and the company's future capital structure.

---

(a) Convertible Debentures

These are debentures that can be converted into equity shares or any other security (like preference shares) at a predetermined time and ratio. The conversion may be at the option of:

• The company, or
• The debentureholder.

Convertible debentures are further classified into two types:

• Fully Convertible Debentures: The entire face value of the debenture is convertible into equity shares. For example, a ₹100 debenture may be converted into 10 equity shares of ₹10 each.
• Partly Convertible Debentures: Only a part of the face value is convertible into shares, while the remaining part is redeemed in cash. For example, a ₹100 debenture may have a ₹60 convertible portion and a ₹40 non-convertible portion.

---

(b) Non-Convertible Debentures

These are debentures that cannot be converted into shares or any other security. The company must repay the entire principal amount in cash at the time of redemption.

---

Accounting Treatment

The accounting treatment for convertible and non-convertible debentures differs only at the time of redemption.

For Non-Convertible Debentures:

At redemption, the company debits the Debentures Account and credits the Bank Account (or Debentureholders' Account) with the full amount.

For Convertible Debentures:

At conversion, the company does not pay cash. Instead, it transfers the liability from the Debentures Account to the Share Capital Account. The journal entry is: