Aniketa Biotech can issue a Rs 500 crore five-year convertible at 3% with a 30% conversion premium, or straight debt at 9%. The share price is Rs 400. Compare the interest saving with the dilution if the stock doubles.

The convertible saves Rs 30 crore a year before tax, Rs 112.5 crore after tax over five years, but if the stock doubles it hands holders shares worth about Rs 269 crore more than the debt. Conversion issues 96.2 lakh shares, 8.8% of the company, still less than the 11.1% a share sale today would cost. Straight debt is cheaper in hindsight if the price ends above about Rs 637.

Because the investor is paid partly in something other than cash. A landlord who lets you rent at a low price in exchange for the right to buy the flat later at a fixed price is not being generous; he is holding an option on the flat. A convertible bondA bond that the holder can exchange for a fixed number of shares of the issuer, usually at a price above the current share price. pays a low coupon because the holder also owns the right to swap into shares at Rs 520, and that right is worth money. The 6 point gap to straight debt is the price of the option, paid in coupon rather than in cash up front.

The saving is easy: 6% of Rs 500 crore is Rs 30 crore a year before tax, Rs 22.5 crore after tax, Rs 112.5 crore over five years. The cost appears only if the shares do well: conversion at Rs 520 issues 96.2 lakh new shares, and every rupee the price climbs above Rs 520 is value that goes to the new holders instead of existing shareholders. At Rs 800 the 96.2 lakh shares are worth Rs 769 crore, Rs 269 crore more than the debt they replace.

Set the value handed over against the interest saved. Holders gain more than the Rs 112.5 crore of after-tax savings once the share price at maturity is above about Rs 637, roughly 59% above today. Below Rs 520 nobody converts and the convertible was simply cheap debt. Between Rs 520 and about Rs 637 it was still cheaper overall. Above that, the company would have been better off paying 9%. This ignores discounting, which would move the crossover slightly lower.

Frame it against the alternatives, not against zero. Compared with selling shares today, the convertible dilutes less, 8.8% against 11.1%, and only if the trials work; compared with straight debt, it saves cash now and gives value away only in the good outcome. For a biotech whose cash burn matters and whose share price could double or halve on one trial, that trade usually suits: pay little while the result is uncertain, and share the upside if it comes. The board should hear the Rs 269 crore figure clearly, because it is the price of the cheap coupon.