ISSUE MANAGEMENT INTRODUCTION
Merchant Banking, as a
commercial activity, took shape in India through the management of Public
Issues of capital and Loan Syndication. It was originated in 1969 with the
setting up of the Merchant Banking Division by ANZ Grind lays Bank. The main
service offered at that time to the corporate enterprises by the merchant banks
included the management of public issues and some aspects of financial
consultancy. The early and mid-seventies witnessed a boom in the growth of
merchant banking organizations in the country with various commercial banks,
financial institutions,thefieldof merchantand bankingbroker‗s. Reform measures
were initiated in the capital market from 1992, starting with the conferring of
statutory powers on the Securities and Exchange Board of India (SEBI) and the
repeal of Capital Issues Control Act and the abolition of the office of the
Controller of Capital Issues. These have brought about significant improvement
in the functional and regulatory efficiency of the market, enabling the Merchant
Bankers shoulder greater legal and moral responsibility towards the investing
MERCHANT BANKERS AND CAPITAL ISSUES
Merchant Banker has
been defined under the Securities & Exchange Board of India (Merchant
Bankers) Rules, 1992 as ―any person who management either by making
arrangements regarding selling, buying or subscribing to securities as manager,
consultant, advisor or rendering corporate advisory service in relation to such
issue management. The capital issue management comprises of the effective
management of market related factors. They are • Transition to rolling
settlement on the equity market • Impact on different classes of market users •
Obtaining a liquid bond market • Impact of reforms of 1990s • Law and taxation • Taxation of
capital • Legal reforms • Political economy of financial sector reforms •
Market design, market inefficiencies, trading profits
Issue Management: The
management of issues for raising funds The management of issues for raising
funds through various types of inst management. The function of capital issues
management in India is carried out by merchant bankers. The Merchant Bankers
have the requisite skill and competence to carry out capital issues management.
The funds are raised by companies to finance new projects, expansion /
modernization/ diversification of existing u contained in SEBI (Merchant
Banker) Rules and Regulations, 1992 clearly brings out the significance of
Issue Management as follows: issue management either by making arrangement
regarding selling, buying or subscribing to securities as manager, consultant,
advisor or rendering corporate advisory services in relation to such issue
1 MERCHANTS OF PUBLIC ISSUE MANAGEMENT
Classification of Securities Issue
Decision to Raise
Capital Funds Preparation and Finalization of Prospectus Obtaining SEBI
Approval Arranging underwriting Selection of Registrars, Brokers, Bankers, etc.
Printing and Publicity of Public Issue Documents Arranging Press for investor
Conference Issue Launch SEBI Compliance
1. Public Issue of Securities When
capital funds are raised through the issue of a prospectus, it
is called ‗‗public
issue of securities‗. It capital market. A security issue may take place either
at part, or at a premium or at a discount.
The Prospectus has to
disclose all the essential facts about the company to the prospective
purchasers of the shares. Further, the prospectus must conform to the formal
set out in Schedule II of the Companies Act, 1956, besides taking into the
account SEBI guidelines. SEBI insists on the adequacy of disclosure of
information that should serve as the basis for investors to make a decision
about the investment of their money.
2. Rights Issue When
shares are issued to the existing shareholders of a company on a privileged basis,
it is called as ‗Rights -emptiveIssue‗rightto. The subscribe to the new issue
of shares. Rights shares are offered as additional issues by corporate to mop
up further capital funds. Such shares are offered in proportion to the capital
paid up on the shares held by them at the time of the offer. It is to be noted
that the shareholders, although privileged to be offered on the issue, are
under no legal obligation to accept the offer. Right shares are usually offered
on terms advantageous to the shareholders.
3. Private Placement When
the issuing company sells securities directly to the investors, especially
institutional investors; it takes the form of private placement. In this case,
no prospectus is issued, since it is presumed that the investors have
sufficient knowledge and experience and are capable of evaluating the risks of
the investment. Private placement covers shares, preference shares and
debentures. The role of the financial intermediary, such as the merchant
bankers and lead managers, assures great significance in private placement.
They involve themselves in the task of preparing an offer memorandum and
negotiating with investors.
2 MERCHANT BANKERS FUNCTIONS
The different functions
of merchant bankers towards the capital issues management are 1. Designing
Capital Structures. 2. Capital Market Instruments. 3. Preparation of
prospectus. 4. Selection of bankers. 5. Advertising Consultants. 6. Choice
regarding registrar to the issue. 7. Arranging for underwriting the proposed
issue. 8. Choice for the bankers to the issue. 9. Choice for the brokers.
1. DESIGNING CAPITAL
STRUCTURE DECISIONS The term capital structure refers to the
proportionate claims of debt and equity in the total long-term capitalization
of a company.
According to Weston
and Brigham, ―Capital structure is the per represented primarily by
long-term-debt, preferred stock and common equity, but excluding all short-term
credit. Common equity includes common stock, capital surplus and accumulated
Structure An ideal mix of various sources of long-term funds
that aims at minimizing the overall cost of capital of the firm, and
maximizes the market value of shares of a firm is known as ‗Optimal capital
structure‗. An optimal capital structure should possess the following
a. Simplicity An
optimal capital structure must be simple to formulate and implement by the financial
executives. For simplicity, it is imperative that the number of securities is
limited to debt and equity.
b. Low Cost A
sound capital structure must aim at obtaining the capital required for he firm
at the lowest possible cost. For this purpose, financial executives must
pay attention to keep the expenses of issue and fixed annual payments at a
minimum. This would help maximize the shareholders‘value.
Maximum Return and Minimum Risks An ideal capital
structure must have a combination of debt and equity in such a manner as to
maximize the firm's profits.
Similarly, the firm
must be guarded against risks such as taxes, interest rates, costs, etc. with
the aim of either reducing them or removing them.
d. Maximum Control The
capital structure must aim at retaining maximum control with the existing
shareholders. The issue of securities should be based on the pattern of voting
rights. It must affect favorably the voting structure of the existing
shareholders, and increase their control on the company‗s affairs.
e. Liquidity In
order to have a sound capital structure, it is important that the various components
help provide the firm greater solvency through higher liquidity. To attain a
high order of liquidity, all such debts that threaten the company’s solvency
must be avoided.
capital structure should be so constructed that it is possible for the company
to carry out any required change in the capitalization in tune with the
changing conditions. Accordingly, the firm must be able to either raise a new
level of capital, or reduce the existing level of capital.
Equitable Capitalization An
ideal capital structure must be neither over capitalized nor under-capitalized.
Capitalization must be based purely on the financial needs of the enterprise.
An equitable capitalization would help make full utilization of the available
capital at minimum cost.
Leverage The firm must attempt to secure a balanced leverage
by issuing both debt and equity at certain ideal proportions. It is best for
the firm to issue debt when the rate of interest is low. Conversely, equity is
suitable where the rate of capitalization is high.
Capital Structure Decisions The following factors
significantly influence the capital structure decision of a firm: Economy
Characteristics The major developments taking place in the economy affect
the capital structure of firms. In order words, the way the economy of a country is managed determines
the way the capital structure of a firm will be determined. Factors that are
active in the economy are:
1. Business activity: The
quality of business activity prevailing in the economy determines the capital
structure pattern of a firm. Under conditions of expanding business activities,
the firm must have several alternatives to source the required capital in order
to undertake profitable investment activities. Under these circumstances, it is
advisable for a firm to undertake equity funding rather than debt funding.
2. Stock market:
The buoyancy, or otherwise, of the capital market greatly influences capital
structure decisions. A study of the capital market trends would greatly help a
firms decision on the quantum and cost of issue. Accordingly, if the stock
market is expected to witness bullish trends, the interest rates will go up and
debt will become costlier.
Taxation: The rates and rules of taxation prevalent in an economy also
affect capital structure decisions. For instance, higher rates of
taxation will be advantageous due to the tax deductibility benefit of debt
funding. Similarly, the taxes on dividend income, if any, would adversely
affect the ability of firms to raise equity capital.
regulations imposed by the state on the quantum, pricing etc. of capital funds
to be raised also influences the capital raised by a firm. For instance,
restrictions have been imposed by SEBI on the issue and allotment of shares and
bonds to different type of investors. A finance manager should take this factor
into consideration while designing the capital structure.
Credit Policy: The
credit policy pronouncements made by the central monetary authority, such
as the RBI, affects the way capital is raised in the market. For instance, the
interest rate liberalization announced by RBI has been dominating the lending
policies of financial institutions. This affects the ability of finance
managers to raise the required funds.
Financial Institutions: The
credit policy followed by financial institutions determines the capital
structure decisions of firms. For instance, restrictive lending terms by
financial institutions may deter firms from raising long-term funds at
reasonable rates of interest. Easy terms, on the other hand, may encourage
firms to obtain a higher quantum of loans.
2. CAPITAL MARKET
INSTRUMENTS Financial instruments that are used for
raising capital resources in the capital market are known as Capital
Market Instruments. The changes that are sweeping across the Indian capital
market especially in the recent past are something phenomenal. It has been
experiencing metamorphic in the last decade, thanks to a host of measures of
liberalization, globalization, and privatization that have been initiated by
the Government. Pronounced changes have occurred in the realm of industrial
policy. Licensing policy, financial services industry, interest rates, etc. The
competition has become very intense and real in both industrial sector and
financial services industry. As a result of these changes, the financial services
industry has come to introduce a number of instruments with a view to
facilitate borrowing and lending of money in the capital market by the
Types of Capital Market
Instruments The various capital market instruments
used by corporate entities for raising resources are as follows: 1.
Preference shares 2. Equity shares 3. Non-voting equity shares 4. Cumulative
convertible preference shares 5. Company fixed deposits 6. Warrants 7.
Debentures and Bonds
1. PREFERENCE SHARES: Shares
that carry preferential rights in comparison with ordinary shares are
called ‗Preference Shares‗ardingpayment. of The pr dividend and the
distribution of the assets of the company in the event of its winding up, in
preference to equity shares.
Types of Preference Shares
Cumulative preference shares: Shares
where the arrears of dividends in times of no and/or lean profits can be
accumulated and paid in the year in which the company earns good profits.
Non-cumulative preference shares: Shares
where the carry forward of the arrears of dividends is not possible.
Participating preference shares: Shares
that enjoy the right to participate in surplus profits or surplus assets
on the liquidation of a company or in both, if the Articles of Association
provides for it.
Redeemable preference shares:
Shares that are to be repaid at the end of the term of issue, the
maximum period of a redemption being 20 years with effect from 1.3.1997 under
the Companies amendment Act 1996. Since they are repayable, they are similar to
debentures. Only fully paid shares are redeemed. Where redemption is made out
of profits, a Capital Redemption Reserve Account is opened to which a sum equal
to the nominal value of the shares redeemed is transferred. It is treated as
paid-up share capital of the company.
cumulative preference shares: Shares comprise two
parts viz., Part A and B. Part A is convertible into equity shares
automatically and compulsorily on the date of allotment. Part B will be
redeemed at par/converted into equity shares after a lock-in period at the
option of the investor, conversion into equity shares taking place after the
lock-in period, at a price, which would be 30 percent lower than the average
market price. The average market price shall be the average of the monthly high
and low price of the shares in a stock exchange over a period of 6 months
including the month in which the conversion takes place.
6. Preference shares with warrants
attached: The attached warrants entitle the holder to apply
for equity shares for
cash, at a ‗premium‗, at any time, i and fifth year from the date of allotment.
If the warrant holder fails to exercise his option, the unsubscribed portion
will lapse. The holders of warrants would be entitled to all rights/bonus
shares that may be issued by the company. The preference shares with warrants
attached would not be transferred/sold for a period of 3 years from the date of
2. EQUITY SHARES:
Equity shares, also
known as „ordinary shares are the shares held by the owners of a corporate
entity. Since equity shareholders face greater risks and have no specified
preferential rights, they are given
larger share in
profits through higher
dividends than those
given to preference shareholders,
provided the company‗s performance is ex dividends in case there are no profits
or the profits do not justify dividend for previous years even when the company
makes substantial profits in subsequent years. Equity shareholders also enjoy
the benefit of ploughing back of undistributed profits kept as reserves and
surplus for the purposes of business expansion. Often, part of these is
distributed to them, as bonus shares. Such bonus shares are entitled to a
proportionate or full dividend in the succeeding year. A strikingly noteworthy
feature of equity shares is that holders of these shares enjoy substantial
rights in the corporate democracy, namely the rights to app of dividend,
enhancement of managerial remuneration in excess of specified limits and fixing
the terms of appointment and election of directors, appointment of auditors and
fixing of their remuneration, amendments to the Articles and Memorandum of
Association, increase of share capital and issue of further shares or
debentures, proposals for mergers and reconstruction and any other important
proposal on which member‗s approval is required under the Companies Act. Equity
shares in the hands of shareholders are mainly reckoned for determining the
management‗s control over the company. Where for the management to retain the
control, as it is not possible for all the shareholders to attend the company's
meeting in full strength. Furthermore, the management group can bolster its
controlling power by acquiring further shares in the open market or otherwise.
Equity shares may also be offered to financial institutions as part of the
private placement exercise. Such a method, however, is brought with the danger
of takeover attempt by financial institutions. Equity shareholders represent
proportionate ownership in a company. They have residual claims on the assets
and profits of the company. They have unlimited potential for dividend payments
and price appreciation in comparison to these owners of debentures and
preference shares who enjoy just a fixed assured return in the form of interest
and dividend. Higher the risk, higher the return and vice-versa. Share
certificates either in physical form or in the demat (with the introduction of
depository system in 1999) form are issued as a proof of ownership of the
shares in a company. Fully paid equity shares with detachable warrants entitle
the warrant holder to apply for a specified number of shares at a determined
price. Detachable warrants are separately registered with stock exchange and
traded separately. The company would determine the terms and conditions
relating to the issue of equity against warrants. Voting rights are granted
under the Companies Act (Sections 87 to 89) wherein each shareholder is
eligible for votes proportionate to the number of shares held or the amount of
stock owned. A company cannot issue shares carrying disproportionate voting
rights. Similarly, voting right cannot be exercised in respect of shares on
which the shareholder owes some money to the company.
shares are of different types. The maximum value of shares as specified in the
Memorandum of Association of the company is called the authorized or
registered or nominal capital. Issued capital is the nominal value of shares
offered for public subscription. In case shares offered for public subscription
are not taken up, the portion of capital subscribed is called subscribed
capital. This is less than the issued capital Paid-up capital is the share
capital paid-up by shareowners which is credited as paid-up on the shares.
Par Value and Book Value
The face value of a
share is called its Par value. Although shares can be sold below the par value,
it is possible that shares can be issued below the par value. The financial
institutions that convert their unpaid principal and interest into equity in
sick companies are compelled to do if at a minimum of Rs.10 because of the par
value concept even though the market price might be much less than Rs.10. Par
value can also lead to unhealthy practices like price rigging by promoters of
sick companies to take market prices above Rs.10 to get their new offers
subscribed. Par value is of use to the regulatory agency and the stock
exchange. It can be used to control the number of shares that can be issued by
the company. The par value of Rs.10 per share serves as a floor price for issue
of shares. Book value is the intrinsic value of a share that is calculated to
reflect the net worth of the shareholders of a corporate entity. Cash
Dividends These are dividends paid in cash. A stable payment of cash
dividend is the hallmark of stability of share prices.
Stock Dividends These
are the dividends distributed as shares and issued by capitalizing reserves.
While net worth remains the same in the balance sheet, its distribution between
shares and surplus is altered.
3. NON-VOTING EQUITY SHARES
Consequent to the
recommendations of the Abi amendment to the Companies Act, corporate
managements are permitted to mobilize additional capital without diluting the
interest of existing shareholders with the help of a new instrument called
non-voting equity shares‗. Such shares will be entitled to all the benefits
except the right to vote in general meetings. Such non-voting equity share is
being considered as a possible addition
to the two classes of share capital currently in vogue. This class of shares
has been included by an amendment to the Companies Act as a third category of
shares. Corporates will be permitted to issue such share up to a certain
percentage of the total share capital. Non-voting equity shares will be
entitled to rights and bonus issues and preferential offer of shares on the same
lines as that of ordinary shares. The objective will be to compensate the
sacrifice made for the voting rights. For this purpose, these shares will carry
higher dividend rate than that of voting shares. If a company fails to pay
dividend, non-voting shareholders will automatically be entitled to voting
rights on a prorate basis until the company resumes paying dividend. The
mechanism of issue of non-voting shares is expected to overcome such problems
as are associated with the voting shares as that the ordinary investors are
more inclined towards high return on capital through sizeable dividends and
capital appreciation through the issue of bonus shares and the inability of
corporate to respond to the investors just aspiration for reasonable dividends.
Moreover, there is every need for corporate to spend huge sums of money on a
variety of not-souseful items including colorful and costly annual reports. For
all these above-mentioned reasons, non-voting equity shares are expected to
have a ready and popular marker. In effect, this kind of share is similar to
preference shares with regard to non-voting right but may get the advantage of
higher dividends as well as appreciation in share values through entitlement to
bonus shares which is not available to preference shares.
4. CONVERTIBLE CUMULATIVE PREFERENCE
These are the shares that have the twin advantage of
accumulation of arrears of dividends and the conversion into equity shares.
Such shares would have to be the face value of Rs.100 each. The shares have to
be listed on one or more stock exchanges in the country. The object of the
issue of CCP shares is to allow for the setting up of new projects, expansion
or diversification of existing projects,
normal capital expenditure
for modernization and
for meeting working
requirements. Following are some of the terms and
conditions of the issue of CCP shares :
Debt-equity ratio: For
the purpose of calculation of debt-equity ratio as may be applicable CCPS
is be deemed to be an equity issue.
Compulsory conversion: The
conversion into equity shares must be for the entire issue of CCP shares
and shall be done between the periods at the end of three years and five years
as may be decided by the company. This implies that the conversion of the CCP
into equity shares would be compulsory at the end of five years and the
aforesaid preference shares would not be redeemable at any stage.
Fresh issue: The
conversion of CCP shares into equity would be deemed as being one resulting
from the process of redemption of the preference shares out of the proceeds of
a fresh issue of shares made for the purposes of redemption.
Preference dividend: The
rate of preference dividend payable on CCP shares would be 10 percent.
Guideline ratio: The
guideline ratio of 1:3 as between preference shares and equity shares would
not be applicable to these shares.
Arrears of dividend:
The right to receive arrears of dividend up to the date of conversion, if any,
shall devolve on the holder of the equity shares on such conversion. The holder
of the equity shares shall be entitled to receive the arrears of dividend as
and when the company makes profit and is able to declare such dividend.
Voting right: CCPS
would have voting rights as applicable to preference shares under the companies
amount of the issue of CCP shares would be to the extent the company would be
offering equity shares to the public for subscription.
5. COMPANY FIXED DEPOSITS:
Fixed deposits are the
attractive source of short-term capital both for the companies and investors as
well. Corporates favor fixed deposits as an ideal form of working capital
mobilization without going through the process of mortgaging assets. Investors
find fixed deposits a simple avenue for investment in popular companies at
attractively reasonable and safe interest rates. Moreover, investors are
relieved of the problem of the hassles of market value fluctuation to which
instruments such as shares and debentures are exposed. There are no transfer
formalities either. In addition, it is quite possible for investors to have the
option of premature repayment after 6 months, although such an option entails
some interest loss.
these instruments are unsecured; there is a lot of uncertainty about the repayment
of deposits and regular payment of interest. The issue of fixed deposits is
subject to the provisions of the Companies Act and the Companies (Acceptance of
Deposits) Rules introduced in February 1975. Some of the important regulations
of an advertisement as approved by the Board of Directors in dailies circulating
in the state of incorporation.
Liquid assets :
Maintenance of liquid assets equal to 15 percent (substituted for 10% by Amendment
Rules, 1992) of deposits (maturing during the year ending March 31) in the form
of bank deposits, unencumbered securities of State and Central Governments or
unencumbered approved securities.
in the newspaper advertisement the quantum of deposits remaining unpaid
after maturity. This would help highlight the defaults, if any, by the company
and caution the depositors.
Deemed public Company : Private
company would become a deemed public company (from June 1998, Section
43A of the Act) where such a private company, after inviting public deposits
through a statutory advertisement, accepts or renews deposits from the public
other than its members, directors or their relatives. This provision, to a
certain extent, enjoins better accountability on the part of the management and
under the law for default by companies in repaying deposits as and when they
mature for payment where deposits were accepted in accordance with the Reserve
CLB : Empowerment
to the Company Law Board to direct companies to repay deposits, which
have not been repaid as per the terms and conditions governing such deposits,
within a time frame and according to the terms and conditions of the order.
An option issued by a
company whereby the buyer is granted the right to purchase a number of shares
of its equity share capital at a given exercise price during a given period is
called a ‘warrant’. Although tradingockmarketsfor morein warra than 6 to 7
decades, they are being issued to meet a range of financial requirements by the
Indian corporate. A security issued by a company, granting its holder the right
to purchase a specified the Indian context are called ‗sweeteners‗and were
issued by a few Indian companies since 1993. Both warrants and rights entitle a
buyer to acquire equity shares of the issuing company. However, they are
different in the sense that warrants have a life span of three to five years
whereas; rights have a life span of only four to twelve weeks (duration between
the opening and closing date of subscription list). Moreover, rights are
normally issued to effect current financing, and warrants are sold to
facilitate future financing. Similarly, the exercise price of warrant, i.e. The
price at which it can be exchanged for share, is usually above the market price
of the share so as to encourage existing shareholders to purchase it. On the
other hand, one warrant buys one equity share generally, whereas more than one
rights may be needed to buy one share. The detachable warrant attached to each
share provides a right to the warrant holder to apply for additional equity
share against each warrant.
7. DEBENTURES AND BONDS
A document that either
creates a debt or acknowledges it is known as a debenture. Accordingly, any
document that fulfills either of these conditions is a debenture. A debenture,
issued under the common seal of the company, usually takes the form of a
certificate that acknowledges indebtedness of the company. A document that
shows on the face of it that a company has borrowed a sum of money from the
holder thereof upon certain terms and conditions is called a debenture.
Debentures may be secured by way of fixed or floating charges on the assets of
the company. These are the instruments that are generally used for raising
long-term debt capital.
Following are the features of a
India, debentures of various kinds are issued by the corporate bodies,
Government, and others as per the provisions of the Companies Act, 1956
and under the regulations of the SEBI. Section 117 of the Companies Act
prohibits issue of debentures with voting rights. Generally, they are issued
against a charge on the assets of the company but at times may be issued
without any such charge also. Debentures can be issued at a discount in which
case, the relevant particulars are to be filed with the Registrar of Companies.
the case of bearer debentures the terminal value is payable to its bearer. Such
instruments are negotiable and are transferable by delivery. Registered
debentures are payable to the registered holder whose name appears both on the
debenture and in the register of debenture holders maintained by the company.
Further, transfer of such debentures should be registered. They are not
negotiable instruments and contain a commitment to pay the principal and
3. Security: Secured
debentures create a charge on the assets of the company. Such a charge may
be either fixed or floating. Debentures that are issued without any charge on
assets of the company are called ‘unsecured or marked debentures’.
which could be redeemed after a certain period of time are called Redeemable
Debentures. There are debentures that are not to be returned except at the time
of winding up of the company. Such debentures are called Irredeemable
the debenture issue gives the option of conversion into equity shares after
the expiry of a certain period of time, such debentures are called Convertible
Debentures. Non-convertible Debentures, on the other hand, do not have such an
have a great advantage in them in that they carry a regular and reasonable income
for the holders. There is a legal obligation for the company to make payment of
interest on debentures whether or not any profits are earned by it.
holders command a preferential treatment in the matters of distribution of the
final proceeds of the company at the time of its winding up. Their claims rank
prior to the claims of preference and equity shareholders.
KINDS OF DEBENTURES
instruments that are issued by the public limited companies are described below
: 1. Participating debentures 2. Convertible debentures. 3. Debt-equity swaps
4. Zero-coupon convertible notes 5. Secured Premium Notes (SPN) with detachable
warrants 6. Non-Convertible Debentures (NCDs) with detachable equity warrant 7.
Zero-interest Fully Convertible Debentures (FCDs) 8. Secured zero-interest
Partly Convertible Debentures (PCDs) with detachable and separately tradable
warrants 9. Fully Convertible Debentures (FCDs) with interest (optional) 10.
Floating Rate Bonds (FRB)
debentures: Debentures that are issued by a body
corporate which entitle the holders to participate in its profits are
cal corporate debt securities. They are popular among existing dividend paying
2. Convertible debentures
Convertible debentures with options
derivative of convertible debentures that give an option to both the
issuer, as well as the investor, to exit from the terms of the issue. The
coupon rate is specified at the time of issue.
Third party convertible debentures are
debts with a warrant that allow the investor to subscribe to the equity
of a third firm at a preferential price vis-à-vis market price, the interest
rate on the third party convertible debentures being lower than pure debt on
account of the conversion option.
debentures redeemable at a premium:
Premium are issued at
face value with a put option entitling investors to sell the bond to the
issuer, at a premium later on. They are basically similar to convertible
debentures but have less risk.
3. Debt-equity swaps:
They are offered from
an issue of debt to swap it for equity. The instrument is quite risky for the
investor because the anticipated capital appreciation may not materialize.
4. Zero-coupon convertible note:
These are debentures
that can be converted into shares and on its conversion the investor forgoes
all accrued and unpaid interest. The zero-coupon convertible notes are quite
sensitive to changes in the interest rates.
5. SPN with detachable warrants:
These are the Secured
Premium Notes (SPN) with detachable warrants. These are the redeemable
debentures that are issued along with a detachable warrant. The warrant
entitles the holder to apply and get equity shares allotted, provided the SPN
is fully paid. The warrants attached to it assure the holder such a right. No
interest will be paid during the lock-in period for SPN. The SPN holder has an
option to sell back the SPN to the company at par value after the lock-in
period. If this option is exercised by the holder, no interest/premium will be
paid on redemption. The holder will be repaid the principal and the additional
interest/ premium amount in installments as may be decided by the company. The
conversion of detachable warrant into equity shares will have to be done within
the time limit notified by the company.
6. NCDs with detachable equity warrants:
Non-Convertible Debentures (NCDs) with detachable equity warrants. These
entitle the holder to buy a specific number of shares from the company at a
predetermined price within a definite time frame. The warrants attached to
NCDEs are issued subject to full payment of the NCDs value. The option can be
exercised after the specific lock-in period. The company is at liberty to
dispose of the unapplied portion of shares if the option to apply for
equalities is not exercised.
7. Zero interest FCDs:
These are Zero-interest
Fully Convertible Debentures on which no interest will be paid by the issuer
during the lock-in period. However, there is a notified period after which
fully paid FCDs will be automatically and compulsorily converted into shares.
In the event of a company going in for rights issue prior to the allotment of
equity (resulting from the conversion of equity shares into FCDs), it shall do
so only after the FCD holders are offered securities.
8. Secured Zero interest PCDs with
detachable and separately tradable warrants:
These are Secured Zero
Interest Partly Convertible Debentures with detachable and separately tradable
warrants. They are issued in two parts. Part A is a convertible portion that
allows equity shares to be exchanged for debentures at a fixed amount on the
date of allotment. Part B is a non-convertible portion to be redeemed at par at
the end of a specific period from the date of allotment. Part B which carries a
detachable and separately tradable warrant provides the warrant holder an
option to received equity shares for every warrant held, at a price worked out
by the company.
9. Fully Convertible Debentures (FCDs)
with interest (optional):
These are the
debentures that will not yield any interest for an initial short period after
which the holder is given an option to apply for equities at a premium. No
additional amount needs to be paid for this. The option has to be indicated in
the application form itself. Interest on FCDs is payable at a determined rate
from the date of first conversion to the date of second/final conversion and in
lieu of it, equity shares will be issued.
These are the bonds
where the yield is linked to a benchmark interest rate like the prime rate in
USA or LIBOR in the Euro currency market. For instance, the State Bank of
India‗s floating rate bond, issue was
linked to the maximum interest on term deposits that was 10 percent at the
time. The floating rate is quoted in terms of a margin above of below the
benchmark rate. Interest rates linked to the benchmark ensure that neither the
borrower nor the lender suffer from the changes in interest rates. Where
interest rates are fixed, they are likely to be inequitable to the borrower
when interest rates fall and inequitable to the lender when interest rates rise
The preferential issue
of equity shares/Fully Convertible Debentures (FCDs/Partly Convertible
Debentures (PCDs) or any other financial instruments which would be converted
into or exchanged with equity shares at a later date, by listed companies whose
equity share capital is listed on any stock exchange, to any selected group of
persons under the Companies Act, 1956 on private placement basis shall be
governed by these guidelines. Such preferential issues by listed companies by
way of equity shares/Fully Convertible Debentures (FCDs)/Partly Convertible
Debentures (PCDs) or any other financial instruments which would be converted
into/exchanged with equity shares at a later date, shall be made in accordance
with the pricing provisions mentioned below