Convertible Bond is a hybrid financial instrument that combines features of both debt and equity. It is a bond issued by a company that can be converted into a predetermined number of shares of the issuing company at the bondholderís option, usually after a specified period. Convertible bonds are popular among investors seeking fixed income with the potential for equity participation, and they play an important role in corporate financing strategies.

The key feature of a convertible bond is its ability to convert into equity shares. Bondholders earn regular interest payments like traditional bonds until they choose to convert. The conversion price and ratio are specified at issuance, providing clarity on how many shares the bond will convert into. This feature allows investors to benefit from potential stock price appreciation while retaining downside protection through fixed interest.

Convertible bonds offer several advantages. For investors, they provide a combination of stable returns through interest payments and the opportunity to participate in equity upside. For issuing companies, convertible bonds can raise capital at a lower interest rate compared to traditional bonds, as investors are compensated for potential future equity gains. This makes them an attractive financing tool, particularly for growth-oriented companies.

In India, convertible bonds are regulated under the Securities and Exchange Board of India (SEBI) guidelines. Companies issuing convertible bonds must disclose conversion terms, rights of bondholders, and other conditions clearly to ensure transparency and protect investor interests. Convertible bonds can be traded on stock exchanges or over-the-counter, providing liquidity to investors.

Convertible bonds are widely used in corporate finance for raising funds, reducing interest burden, and aligning investor incentives with company performance. They are also an effective instrument for portfolio diversification, balancing fixed-income stability with equity growth potential.

In summary, a convertible bond is a hybrid security offering fixed income with the option to convert into equity. By understanding conversion features, benefits, and regulatory guidelines, investors can make informed decisions, and companies can leverage this instrument for efficient capital raising while maintaining financial flexibility.