What’s in a Debenture? Valuing the Underrated Cousin of Equity
Equity often gets the limelight, but debentures quiet, structured, and contractual carry their own valuation complexities that deserve attention.
The Basics
Debenture = Debt. Not ownership.
It promises fixed returns, no management say, and carries only one risk: default. Yet, its valuation is anything but default.
Valuation Insights
Non-Convertible Debentures (NCDs) → Valued like a bond
PV of interest + redemption, discounted using YTM of comparable risk instruments.
Convertible Debentures (CDs) → A hybrid beast
Pre-conversion = debt
Post-conversion = equity
Valued using option pricing or split valuation (Ve + Vd).
Demi-Proxy Approach
Sometimes, valuers use equity valuation as a benchmark—especially for regulatory thresholds under FEMA, Companies Act, and Income Tax.
Why It Matters
Whether you’re pricing CCDs in a startup deal or issuing OCDs under Section 62(1)(c), ignoring the nuances can mean mispricing risk, misreporting fair value, or non-compliance.
Takeaway for Valuers & Dealmakers:
Debentures may be debt on paper—but their valuation often demands equity-level analysis.
Because in valuation, form follows function—but value follows substance.
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