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Synopsis For Corporate Finance

The document discusses the differences between optionally convertible debentures (OFCDs) and compulsorily convertible debentures (CCDs) as methods for corporate financing. OFCDs allow investors the choice to convert debt to equity, while CCDs mandate conversion. From an investor perspective, OFCDs are safer as they can choose to receive repayment over mandatory conversion. However, from a corporate perspective, CCDs provide more flexibility and do not require repayment of principal.

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Yashna Singh
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30 views2 pages

Synopsis For Corporate Finance

The document discusses the differences between optionally convertible debentures (OFCDs) and compulsorily convertible debentures (CCDs) as methods for corporate financing. OFCDs allow investors the choice to convert debt to equity, while CCDs mandate conversion. From an investor perspective, OFCDs are safer as they can choose to receive repayment over mandatory conversion. However, from a corporate perspective, CCDs provide more flexibility and do not require repayment of principal.

Uploaded by

Yashna Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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TOPIC - OFCDS V. CCDS: THE BETTER OPTION FOR CORPORATE FINANCING?

SYNOPSIS

Debentures are a type of debt instrument that is used to raise funds. Section 2(30) of the
Companies Act, 2013 [“Act”] defines it as any instrument that indicates a debt owed by the
company, regardless of whether it creates a charge against the company's assets or not. We can
thus say that a debenture is a loan document that certifies the company's obligation to repay the
principal amount plus interest at a predetermined rate. Additionally, a company is permitted by
Section 71 of the Act to issue debentures with the option to convert such debentures into shares,
in whole or in part, at the time of redemption. Debentures, based on their convertibility, are of
two types: convertible and non-convertible. We saw that two of the various methods a business
can raise money are through OFCDs and CCDs. Both of them are debentures which may later be
converted into equity. However, the main distinction between both is that in OFCDs, investors
have the choice to convert, whereas in CCDs, debt must be mandatorily converted into equity.

FROM THE PERSPECTIVE OF INVESTOR

After comparing and contrasting OFCDs and CCDs, we come to the conclusion that, from the
perspective of the investor, OFCDs are a safer instrument to use for investments because there is
less risk. If the business is struggling, investors can simply receive their principal and interest
back without having the debt converted into equity. When we examine how OFCDs function, we
see that investors who invest in them are safeguarded from a sharp decline in stock values in the
share market. This is because retail investors receive OFCDs from a corporation with fixed time
periods. Within that specified time, these bonds may be converted into shares at a predetermined
price. A debt-holder or investor would only convert these debentures into equity when the share
is priced above the pre-determined price in the share market and when the company is expected
to make significant profits in the near future (as this would cause the shareholder to earn more
dividends). The investors in CCDs, unlike in OFCDs, do not have the protection in the event

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that the shares trade below the predetermined trading price since CCDs are compulsorily
converted into equity. Hence, OFCDs are a better option for investment.

FROM THE PERSPECTIVE OF THE CORPORATION

we find that CCDs are a better option for corporate financing because they offer flexibility in the
company's valuation. Due to the fact that debt will be forced into equity, the companies do not
have to spend money repaying the debt or set money aside in an escrow account for repayment
obligations as they would with OFCDs. Additionally, CCDs are eligible for tax benefits and
privileges that are not available to equity shares. Also as it doesn't require any underlying
collateral services as security, it is also a great tool for raising money. Moving onto OFCDs
which may be converted to shares at the option of the investor. Hence, there may be a probability
that the investor may decide to not convert them. This would cause the company to pay back the
principal amount invested and is especially troublesome for start- ups which are usually short on
cash. Thus, companies with high levels of debt may find it difficult to raise money through
OFCDs. It may lead to cash crunches in the company and are not a feasible option for debt-laden
companies. Hence, CCDs are a better option for corporate financing.

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