One of the main objectives of a prudent investor is not only to get good returns on his/her investment, but also an ability to manage risks and exposure. That is why if you look at the portfolio of a seasoned investor, you will often find it to contain:

1) FD: one third to half of the portfolio… fixed returns, almost zero risk.
1) Blue chip shares (long term investment… medium risk, decent returns.. should constitute bulk of the equities you hold)
3) Mutual funds (unless it is an exotic, esoteric sector fund, it can be treated as a blue chip)
4) proceeds from IPOs: low returns (primarily due to high level of over-subscription and low allotments), low risks (unless you apply in all tom dicks and harry)
5) Short term investment: Any investment based on the short term market conditions.. usually made with a day/week time frame horizon… high risk but fabulous returns (it usually constitutes bulk of the portfolio for a trader)

Debentures is another exotic financial instrument which people can invest in. Unfortunately Indian debenture market is underdeveloped and hence very few people know about this low risk, moderate returns long term investment instruments. Hence I am writing this post. These are basically low interest rate unsecured bonds issued by companies which upon maturity could be optionally converted to fully paid shares.
More information about this instrument can be obtained at wiki

What does an investor gains:
1) Low risk: all said an done these can be treated as a fixed interest rate instruments. So even if the company stock price is not doing well (but the company is not bankrupt), you won’t lose your invested amount.
2) Stock linked gains: On the maturity date, you will have an option to convert them into equity (at a fixed price determined on the date of issue) In a hypothetical case, suppose the issuing company stock appreciates by 25% p.a. So potentially the stock would rise 3 folds over 5 years. So the investors can pocket the difference 🙂 for an additional gain at the time of maturity.
3) Liquidity: Although they are not very actively traded, but unlike FDs you can sell them in the stock exchange whenever you need to money without attracting any foreclosure penalty.

1) Unlike an RBI controlled bank, you are entrusting your money with an unregulated company. So if the company goes under, you risk to lose your entire investment.
2) Low interest rate: Since most companies are bullish about their stocks, almost all of these debentures have a very low coupon rate. So if the stock is not doing very well, even though you do not lose your investment, the inflation would potentially eat into its purchasing power.
3) Long gestation period: For all practical purposes, these are like bonds.. hence are not advised for individuals looking for a quick buck.

Why companies issue them:
1) Low interest rate: Because of this, debentures usually translates as the cheapest source of capital.
2) Because of the convertibility, the company is able to move these funds from debt to equity portion of the balance sheet and hence improve the leverage (debt to equity ratio).
3) Reward the investors: In most of the cases, the debentures are issued to the existing stock holders and promoters and not through an open offer. However, outsiders are permitted to buy them from the secondary market.

Here are some warrants/debentures I could find:
Bajaj Auto Finance Ltd.
Dalmia Cement (Bharat) Ltd.
Deepak Nitrite Ltd.
Kirloskar Ferrous Industries Ltd.
Orbit Corporation Ltd.
Sardar Sarovar Narmada Nigam Ltd.
Titan Industries Ltd.
Trent Ltd.

Since I do not have any exposure to debentures, If you looking to invest in them… contact your financial adviser. I know Indian Hotels intended to issue them a month ago, but I am not sure about its status.

13 replies on “Debentures”

thanks to over taxation and a bad govtdebt mkt there is no real development in our debt mkts add to it low cost funds from foreign and high demand for equity
read ajays new post
yes debentures are important but fds offer a lot more convenience – the fact that any co can easily hide under the sick units act for years on end without repaying its deb holders and lack of a developed bond mkt is a big hindrance.
worse is that there are horror stories of nonchalant trustees and poor legal system that hardly penalises the rotten managements reminding me of stuff like dr morpen and alpic finance sort of issues.

very true 🙁 foreign debt can be raised at 6% interest… and because of weak dollar… in INR, the cost of these funds turn out to be negative… while indian banks continue to charge 13-15%p.a. interest on INR borrowings.

ya i got it…
actually debentures are for low risk long term investments … something in middle of the fixed returns FD and risky equity.. and what u say is perfectly correct… and thats why its not very popular in India

presuming you already have a demat account, go for the IPOs. Edelweiss Capital, ipo is coming…. check the websites listed in if they give a thumbs up… apply for it.

if the market takes a sufficient fall (which is expected to happen next week) then you can also invest in some good mutual funds…..
my personal favorite being Morgan Stanley Growth fund.

Nah! No mutual funds: I am looking to play in the market. Only thing that is a bitch is that the Sensex may go as low as 16K, if some people are to be believed. Would you buy Infosys and TCS?

I believe that Infosys and TCS should go down another 100/- each… so after that happens, you could buy 5-10 shares..

about sensex hitting 16k.. i know it should go down.. but I have no idea how low.

if u sell d bonds 2 a broker bfore d maturity date i.e 14th feb 2014, then u will hav 2 pay short term capital gains tax on it. if u need a better offer, mail me at i can even offer u payment via demand draft or online a/c xfer to save on d xfer charges & brokerage

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