Partially Convertible Debenture (PCD)

A partially convertible debenture is a type of convertible debenture, part of which will be redeemed by the issuing company after a specified period of time, and part of which is convertible into equity or preference shares at the end of the specified period. The ratio of conversion for the partially convertible debenture is decided by the issuer when the debenture is issued.

Any partial conversion will be optional at the hands of the debenture holder. Partially convertible debentures differ from fully convertible debentures, in which all of the instrument must be converted into equity. However, depending on the specific terms, it is possible that a conversion of such an instrument may be mandatory for that partial debenture once the time period for redemption has been reached or it could be left to the investor’s discretion. Cash is not often involved in the issuance and handling of these instruments because the debentures are converted into equity stocks.

Attracting new investors to help finance a company during a period when its bonds might not offer the best returns can create a challenge to continue with a growth or development strategy. Companies that are seeking medium- or long-term financing through debenture instruments might make partially convertible debentures available to possible investors. The nature of the instrument offers potentially lucrative options for investors while giving the company some control over the conversion and redemption of such bonds. This hybrid instrument differs from fully convertible debentures, which all must be converted to equity shares when the period comes to a close.

The conversation price to turn the debentures into equity stocks is typically higher than the current market price for a company’s shares. The assumption is that the company’s shares will grow in value while this instrument is held, which is why the conversion price is typically set higher than the market value.

Partially convertible debentures may be used as an incentive to make bonds that are otherwise unattractive more appealing to investors. If bonds have yields that are not enticing for investors, the addition of a partial convertible element could make them more worthwhile as investment options.

Depending on the time interval, a partial conversion debenture bond may have a redemption date that is applied part way through the bond’s maturity period. For instance, a 20-year partial conversion debenture bond might have its conversion period set at 10 years.