Convertible bonds are a popular investment instrument in India, combining features of both equity and debt. They are a type of bond that can be converted into equity shares of the issuing company. In this article, we will discuss the basics of convertible bonds and their unique features.

Convertible bonds are issued by companies as a way to raise capital. They are a type of debt instrument that pays a fixed interest rate to the bondholder. However, unlike traditional bonds, convertible bonds can be converted into a predetermined number of equity shares of the issuing company. The conversion ratio is determined at the time of issuance and is based on the market price of the underlying shares at the time of conversion.

Convertible bonds offer several benefits to investors. They provide a fixed income stream through the interest payments, which makes them attractive to income-seeking investors. Additionally, the conversion feature allows investors to participate in the potential upside of the issuing company's equity without having to purchase shares outright. This makes convertible bonds an attractive investment option for investors who want exposure to equity markets but are risk-averse.

In India, convertible bonds are regulated by the Securities and Exchange Board of India (SEBI). One of the unique features of convertible bonds is the conversion premium. This is the amount by which the conversion price of the bond exceeds the market price of the underlying equity shares at the time of issuance. The conversion premium provides a buffer to the investor, protecting them from any downside risk in the equity markets. However, this also means that the interest rate on convertible bonds is generally lower than that of traditional bonds.

Convertible bonds can be either mandatory or optional. Mandatory convertible bonds require the bondholder to convert their bonds into equity shares at a predetermined time or upon the occurrence of a specific event. Optional convertible bonds, on the other hand, provide the bondholder with the choice to convert their bonds into equity shares at any time prior to maturity.

One potential risk associated with convertible bonds is the dilution of existing shareholders. When convertible bonds are converted into equity shares, the number of outstanding shares increases, diluting the ownership of existing shareholders. This can have a negative impact on the value of existing shares, particularly if the conversion ratio is high.

In conclusion, convertible bonds are a unique investment instrument that combines features of both equity and debt. They provide a fixed income stream through interest payments and the potential for participation in the equity markets. Convertible bonds are regulated by SEBI and can be either mandatory or optional. While convertible bonds offer several benefits, they also come with potential risks, including the dilution of existing shareholders. Overall, convertible bonds are an attractive investment option for investors looking for exposure to equity markets with limited risk.