ABC Limited, an Indian profit making dividend paying company, for the past 40 years, proposes to issue convertible debentures. List out the advantages to the company and to the investor of this issue.

Advantages of Convertible Debentures: Advantages to the Company: Capitalization of Interest Cost: Capitalization of interest cost till the date of commissioning of the project is allowed in accordance with accounting principles. If the conversion of the debentures is duly linked with the commissioning of the project, the entire interest cost can be capitalized, without charging the interest to the profit & loss account and pulling down the profits of the company. Lower Interest Cost: Convertible debentures generally carry lower interest rates compared to the rates charged by banks and financial institutions for term loans. Flexibility in Debt-Equity Ratio: From the point of view of the debt-equity ratio, the convertible part of the debentures is treated as equity by financial institutions. This enables the company to have a high degree of flexibility in financing its future projects. Equity Capital Increase: Equity capital increases after each conversion, facilitating easier servicing of equity by payment of dividend. Tax Benefits: Interest on debentures is allowed as a deduction in the computation of the company's taxable income, leading to tax benefits. Additionally, a company with a proven track record and future earning potential can issue debentures at a reasonable premium at the time of conversion, reducing the servicing cost of equity. Popular Form of Financing: This is a popular form of financing for companies as the interest rates are cheaper than those charged by Financial Institutions on term loans. Greater Autonomy: Unlike term loans from Financial Institutions (FIs) and Banks, which often impose many conditions on management, including placing their representative on the Board, convertible debentures offer a greater degree of autonomy to the companies. Advantages to the Investor: Fixed Return and Equity Participation: The investor is assured of a fixed return by way of interest on the debentures till conversion. On conversion, the investor becomes entitled to receive dividends declared on equity shares. This provides a fixed return during the gestation period and project implementation period, followed by potential equity gains. Value Appreciation: As the price of equity shares tends to rise upon completion of the company's project, the investor gets value appreciation on their investment if converted into equity shares. Security and Protection: In most cases, debentures carry security with a charge on all or a part of the company's movable/immovable properties. This assures prompt payment of principal and interest, often with the assistance of a debenture trustee. As per SEBI Regulations, if debentures have a maturity period of 18 months or less, it is mandatory for the company to create security. Liquidity: Convertible debentures listed on stock exchanges enjoy a fair amount of liquidity, depending on the company's track record. Even if debentures are not traded as actively as equity shares, convertible debentures of good companies command reasonable liquidity. If a debenture has several parts, each part can be traded separately or in full on the stock exchanges. Multiple Options: Investors who have bought convertible debentures issued in several parts have options such as: (a) selling all parts immediately on allotment; or (b) selling one or more parts and retaining others till conversion to obtain equity shares for retention or sale.