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PRICING OF THE ISSUE
Preferential Issue of Shares:
The issue of shares on a preferential basis can be made at a price not less than the higher of the following:
a. The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date (thirty days prior to the date on which the meeting of general body of shareholders is held in terms of Section 81(1A) of the Companies Act, 1956 to consider the proposed issue) (or)
b. The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange (any of the recognized stock exchanges in which the shares are listed and in which the highest trading volume in respect of the shares of the company has been recorded during the preceding 6 months prior to the relevant date) during the two weeks preceding the relevant date.
Pricing of Shares arising out of warrants, etc
Where warrants are issued on a preferential basis with an option to apply for and be allotted shares, the issuer company shall determine the price of the resultant shares. The relevant date for the above purpose may, at the option of the issuer be either the one referred to above or a date 30 days prior to the date on which the holder of the warrants becomes entitled to apply for the said shares. The resolution to be passed in terms of section 81(1A) shall clearly specify the relevant date on the basis of which price of the resultant shares shall be calculated. An amount equivalent to at least ten percent of the price fixed in terms of the above shall become payable for the warrants on the date of their allotment. The amount referred to above shall be adjusted against the price payable subsequently for acquiring the shares by exercising an option for the purpose. The amount so referred to above shall be forfeited if the option to acquire shares is not exercised.
Pricing of shares on conversion:
Where PCDs/FCDs/other convertible instruments, are issued on a preferential basis, providing for the issuer to allot shares at a future date, the issuer shall determine the price at which the shares could be allotted in the same manner as specified for pricing of shares allotted in lieu of warrants as indicated above.
Currency of Financial instruments:
In case of warrants/PCDs/FCDs/or any other financial instruments with a provision for the allotment of equity shares at a future date, either through conversion or otherwise, the currency of the instruments shall not exceed beyond 18 months from the date of issue of the relevant instrument.
Non-Transferability of Financial Instruments:
The instruments allotted on a preferential basis to the promoter/promoter group shall be subject to lock-in period of 3 years from the date of their allotment. In any case, not more than 20 percent of the total capital (equity share capital issued by way of public/ rights issue including equity shares emerging at a later date out of any convertible securities/ exercise of warrants and equity shares or any other security convertible at a later date into equity issued on a preferential basis in favor of promoter/promoter groups) of the company, including capital brought in by way of preferential issue, shall be subject to lock-in of 3 years from the date of allotment. The lock-in on shares acquired by conversion of the convertible instrument/exercise of warrants shall be reduced to the extent the convertible instrument warrants have already been locked-in. For computation of 20 percent of the total capital of the company, the amount of minimum promoter‘s contribution-in,inthepast asheldperguidelinesandshall blockedtakeninto account. The minimum promoter‘s contribution-in,even though it is considered for computing the requirement of 20 percent of the total capital of the company, in case they saidutionisfreeminimumoflock-atthe timepromoter‘softhe preferential issue. These locked in shares/instruments can be transferred to and amongst promoter/ promoter group subject to continuation of lock-in the hands of transferees for the remaining period, and compliance of Securities and Exchange Board of India (Substantial Acquisition of shares and Takeovers) Regulations, 1997, if applicable.
Currency of Shareholders Resolutions:
Allotment pursuant to any resolution passed at a meeting of shareholders of a DFI granting consent for preferential issues of any financial instrument, shall be completed within a period of 3 months from the date of passing of the resolution. If allotment of instruments and dispatch of certificates is not completed within three months from the date of such resolution, a fresh consent of the shareholders shall be obtained and the relevant date referred to above will relate to the new resolution.
Certificate from Auditors:
In case of every issue of shares/warrants/FCDs/PCDs/other financial instruments having conversion option, the statutory auditors of the issuer DFI shall certify that the issue of said instruments is being made in accordance with the requirements contained in these guidelines. Copies of the auditor‘s certificate shall also be laid before the meeting of the shareholders convened to consider the proposed issue.
Preferential Allotments to FIIs:
Preferential allotments, if any to be made in case of Foreign Institutional Investors, shall also be governed by the guidelines issued by the Government of India/Board/Reserve Bank of India on the subject.
Non-applicability of the Guidelines:
The above guidelines shall not be applicable where the further shares are allotted in pursuance to the merger and amalgamation scheme approved by the High Court and where further shares are allotted to a person/group of persons in accordance with the provisions of rehabilitation packages approved by BIFR. In case, such persons are promoters or belong to promoter group lock-in provisions shall continue to apply unless otherwise stated in the BIFR order. Similarly, the above guidelines are not applicable where further shares are allotted to all India public financial institutions in accordance with the provision of the loan agreements signed prior to August 4, 1994.
1 Global Debt Instruments
Following are some of the debt instruments that are popular in the international financial markets:
Income Bonds Interest income on such bonds is paid only where the corporate command adequate cash flows. They resemble cumulative preference shares in respect of which fixed dividend is paid only if there is profit earned in a year, but carried forward and paid in the following year. There is no default on income bonds if interest is not paid. Unlike the dividend on cumulative preference shares, the interest on income bond is tax deductible. These bonds are issued by Corporates that undergo financial restructuring.
Asset Backed Securities
These are a category of marketable securities that are collateralized by financial assets such as installment loan contracts. Asset backed financing involves a disinter- mediating process called ‘securitization’, whereby credit from financial intermediaries in the form of debentures are sold to third parties to finance the pool. REPOS are the oldest asset backed security in our country. In USA, securitization has been undertaken for the following the oldest asset backed security in our country. In USA, securitization has been undertaken for the following: 1. Insured mortgages 2. Mortgage backed bonds 3. Student loans 4. Trade credit receivable backed bonds 5. Equipments leasing backed bonds 6. Certificates of automobile receivable securities 7. Small business administration loans 8. Credit and receivable securities.
Junk bond is a high risk, high yield bond which finances either a Leveraged Buyout (LBO) or a merger of a company in financial distress Junk bonds are popular in the USA and are used primarily for financing takeovers. The coupon rates range from 16 to 25 percent. Attractive deals were put together establishing their feasibility in terms of adequacy of cash flows to meet interest payments. Michael Milken (the junk bond king) of Drexel Burnham Lambert was the real developer of the market.
These are the bonds whose interest payment and redemption value are indexed with movements in prices. Indexed bonds protect the investor from the eroding purchasing power of money because of inflation. For instance, an inflation-indexed bond implies that the payment of the coupon and/or the redemption value increases or decreases according to movements in prices. The bonds are likely to hedge the principal amount against inflation. Such bonds are designed to provide investors an effective hedge against inflation so as to enhance the credibility of the anti-inflationary policies of the Government. The yields of an inflation-indexed bond provide vital information on the expected rate of inflation. United Kingdom, Australia, and Canada have introduced index linked government securities as a segmented internal debt management operation with a view to increase the range of assets available in the system, provide an inflation hedge to investors, reduce interest costs and pick up direct signals, and the expected inflation and real rate of interest from the market.
Zero-Coupon Bonds (ZCBs)/Zero Coupons Convertible Debentures
Zero Coupon Bonds first came to be introduced in the U.S. securities market. Initially, such bonds were issued for high denominations. These bonds were purchased by large security brokers in large chunks, who resold them to individual investors, at a slightly higher price in affordable lots. Such bonds were called ―Treasury Investment Growth Receipts’(TIGRs) or ‘Certificate of Accruals on Treasury Securities’(CATSs) or ZEROs as their coupon rate is Zero. Moreover, these certificates were sold to investors at a hefty discount and the difference between the face value of the certificate and the acquisition cost was the gain. The holders are not entitled for any interest except the principal sum on maturity.
Zero-Coupon Bonds offer a number of advantages as shown below a. No botheration of periodical interest payment for the issues b. The attraction of conversion of bonds into equity shares at a premium or at par, the investors usually being rewarded by way of a low premium on conversion c. There is only capital gains tax on the price differential and there is no tax on accrued income d. Possibility of efficient servicing of equity as there is no obligation to pay interest till maturity and the eventual conversion. Mahindra & Mahindra came out with the scheme of Zero Coupon Bonds for the first time in India along with 12.5 percent convertible bonds for part financing of its modernization and diversification scheme. Similarly, Deep Discount Bonds were issued by IDBI at Rs.2, 000 for a maturity of Rs.1 lakh after 25 years. These are negotiable instruments transferable by endorsement and delivery by the transferor. IDBI also offered Option Bonds which may be either cumulative or non-cumulative bonds where interest is payable either on maturity or periodically. Redemption is also offered to attract investors.
Floating Rate Bonds (FRBs)
Bonds that carry the provision for payment of interest at different rates for different time periods are known as ‘Floating Rate Bonds’. T in the Indian capital market. The SBI, while issuing such bonds, adopted a reference rate of highest rate of interest on fixed deposit of the Bank, provided a minimum floor rate payable at 12 percent p.a. and attached a call option to the Bank after 5 years to redeem the bonds earlier than the maturity period of 10 years at a certain premium. A major highlight of the bonds was the provision to reduce interest risk and assurance of minimum interest on the investment provided by the Bank.
Secured Premium Notes (SPNs)
Secured debentures that are redeemable of a premium over the issue price or face value are called secured premium notes. Such bonds have a lock-in period during which period no interest will be paid. It entitles the holder to sell back the bonds to the issuing company at par after the lock-in period. A case in point was the issue made by the TISCO in the year 1992, where the company wanted to raise money for its modernization program without expanding its equity excessively in the next few years. The company made the issue to the existing shareholders on a rights basis along with the rights issue. The salient features of the TISCO issue were as follows : 1. Face value of each SPN was Rs.300 2. No interest was payable during the first three years after allotment 3. The redemption started at the end of the fourth year of issue 4. Each of the SPN of Rs.300 was repaid in four equal annual installments of Rs.75, which comprised of the principal, the interest and the relevant premium. (Low interest and high premium or high interest and low premium, at the option to be exercised by the SPN holder at the end of the third year) 5. Warrant attached to each SPN entitled the holder the right to apply for or seek allotment of one equity share for cash payment of Rs.80 per share. Such a right was exercisable between first year and one.-and-a-half year after allotment by which time the SPN would be fully paid up. This instrument tremendously benefited TISCO, as there was no interest outgo. This helped TISCO to meet the difficulties associated with the cash generation. In addition, the company was able to borrow at a cheap rate of 13.65 percent as against 17 to 18 percent offered by most companies. This enabled the company to start redemption earlier through the generation of cash flow by the company’s projects. The investors had the flexibility of tax planning while investing in SDPNs. The company was also equally benefited as it gave more flexibility.
Euro Convertible Bonds
Bonds that give the holders of euro bonds to have the instruments converted into a wide variety of options such as the call option for the issuer and the put option for the investor, which makes redemption easy are called ‘Euro-convertible bonds’. A euro convertible bond essentially resembles the Indian convertible debenture but comes with numerous options attached. Similarly, a euro-convertible bond is an easier instrument to market than equity. This is because it gives the investor an option to retain his investments as a pure debt instrument in the event of the price of the equity share falling below the conversion price or where the investor is not too sure about the prospects of the company.
Popularity of convertible euro bonds
A convertible bond issue allows an Indian company far greater flexibility to tap the Euro market and ensures that the issue has a better market reception than would be possible for a direct equity issue. Moreover, newly industrialized countries such as Korea have chosen the convertible bond market as a stepping-stone to familiarity and acceptance of their industrial companies in the international market. The convertible bonds offer the following advantages:
a. Protection: Euro convertible bonds are favored by international investors as it offers them the advantage of protection of their wealth from erosion. This is possible because the conversion is only an option, which the investors may choose to exercise only if it works to their benefit. This facility is not available for equity issues.
b. Liquidity: Convertible bond market offers the benefit of the most liquid secondary market for new issues. Fixed income funds as well as equity investment managers purchase convertible bonds.
c.Flexibility: The feature of flexibility in structuring convertible bonds allows the company to include some of the best possible clauses of investors’ protection by incorpo0rating the unusual features of equity investments. A case in point is the issues made by the Korean corporate sector, which contained a provision in the issue of convertible euro bonds. The provision entitled the holders to ensure the due compliance of the liberalization measures that had already been announced within a specified period of time. Such a provision enabled the investor to opt for a put‘ option.
d. Attraction investment: The issue of convertible debentures facilitates removal of many of the unattractive features of equity investment. For investors, convertible bond market makers are the principal sources of liquidity in their securities.
Bond Issue –Indian Experience
In recent times, all-India financial institutions have come to design and introduce special and innovative bond instruments exclusively structured on the investors’ preferences and funds requirement of the issuers. The emphasis from the issuer’s view point is the resource mobilization and not risk exposure. Several financial institutions such as the IDBI, the ICICI, etc. are engaged in the sale of such bonds. A brief description of some these bonds are presented below:
1. IDBIs Zero Coupon Bonds, 1996:
These bonds are sold at a discount and are paid no interest. It is of great advantage to issuers as it is not required for them to make periodic interest payment.
2. IDBIs Regular Income Bonds, 1996:
These were the bonds issued by the IDBI as 10-year bonds carrying a coupon of 16 percent, payable half-yearly. The bonds provided an annualized yield equivalent to 16.64 percent. The bonds, which were priced at Rs.5, 000 can be redeemed at the end of every year, after the third year allotment. There was also a call option that entitled the IDBI to redeem the bonds five years from the date of allotment.
3. Retirement Bonds, 1996:
The IDBI Retirements Bonds were issued at a discount. The issue targeted investors who are planning for retirement. Under the scheme,. Investors get a monthly income for 10 years after the expiry of a wait period, the wait period being chosen by the investor. Thereafter, the investors also get a lump sum amount, which is the maturity value of the bond.
4. IFCIs Bonds, 1996
These bonds include:
a. Deep Discount Bonds –Issued for a face value of Rs.1 lakh each.
b. Regular Income and Retirement Bonds –They had a five-year tenure, a semiannual yield of 16 percent and a front-end discount of 4 percent. The bonds had three-year put option and an early bird incentive of 0.75 percent.
c. Step-up Liquid Bond –The five-year bonds with a put option every year with a return of 16 percent, 16.25 percent, 16.5 percent, 16.75 percent, and 17 percent at the end of every year.
d. Growth Bond –An investment of Rs.20, 000 per bond under this scheme entitles investors to
a Rs.1 lakh face-value bond maturing after 10 years. Put options can be exercised at the end of 5 and 7 years respectively. If exercised, the investor gets Rs.43, 500 after 5 years and Rs.60, 000 after a 7 year period.
e. Lakhpati Bond –The maturity period of these bonds varied from l5 to 10 years, after which the investor gets Rs.1 lakh. The initial investment required was Rs.20,000 for 10 years maturity,
Rs,.23,700 for 9 years, Rs,28,000 for 8 years, Rs.33,000 for 7 years, Rs.39,000 for 6 years and Rs.46,000 for 5 years maturity.
5. ICICIs Bonds, 1997 ICICI came out with as many as five bonds in March 1997. These are encash bonds, index bonds, regular income bonds, deep discount bonds, and capital gain bonds. The bonds were aimed at meeting the diverse needs of all categories of investors, besides contributing to the widening of the bond market so as to bring the benefits of these securities to even the smallest investors.
a. Capital gains bond - Also called infrastructure bonds incorporated the capital gains tax relaxations under Section 54EA of the Income Tax Act announced in the Union Budget for 1997-98. They are issued for 3 and 7 years maturity. 20 percent rebate was available under Section 88 of the I.T. Act for investors on the amount invested in the capital gains bonds up to a maximum of Rs.70, 000. They can avail benefit under Section 88. The annual interest rate worked out to 13.4 percent while the annual yield came to 20.7 percent. However, investment through stock invest will not qualify for the rebate.
Encash Bond –The five-year encash bonds were issued at a face value of Rs.2,000 and can be redeemed at par across the country in 200 cities during 8 months in a year after 12 months.
The bond had a step-up interest every year from 12 to 18.5 percent and the annualized yield at maturity for the bond works out to 15.8 percent. The encashing facility, however, is available only to the original bondholders. The bonds not only offer higher return but also help widen the banking facilities to investors. The secondary market price of the bonds is likely to be favorably influenced by the step-up interest that results in an improved YTM every year.
c. Index Bond –It gives the investor both the security of the debt instrument and the potential of the appreciation in the return on the stock market. Priced at Rs.6,000 the index bond has two parts:
Part A is a deep discount bond of the face value of Rs.22,000 issued for a 12 year period. Its calculated yield was 15.26 percent. It also has a call and a put option attached to it assuring the investor a return of Rs.9, 300 after 6 years option is exercised.
Part B is a detachable index warrant issued for 12 years and priced at Rs.2,000. The yield was linked to the BSE SENSEX. The face value of the bond will appreciate the number of times the SENSEX has appreciated. The investors‘ returns will be treated as capital gains.
6. Tax Free Bonds: The salient features of the tax-free Government of India bonds to be issued from October 1, 2002 are as follows:
a. Interest rate –The bonds will carry an interest rate of 7 percent.
b. Tax exemption –The bonds will be exempt from Income-tax and Wealth-tax.
c. Maturity –The bonds will have a maturity period of six years.
d. Ceiling –The bonds investment will have no ceiling.
e. Tradability - The bonds will not be traded in the secondary market.
f. Investors –The eligible investors include individuals and Hindu Undivided Families, NRIs are not eligible for investing in these bonds.
g. Issue price Bonds will be issued for a minimum amount of Rs.1,000 and its multiples.
h. Maturity value –The cumulative maturity value of the bond will be Rs.1.511 at the end of six years.
i. Form of issue –The bonds will be both in demat form as well as in the traditional form of stock certificates. Option once chosen cannot be changed.
j. Transferability –Bonds will not be transferable except by way of gift to relatives as defined in the Companies Act.
k. Collaterals –The bonds cannot be used as collaterals for obtaining loans from banks, financial institutions and non-banking financial companies.
l. Nomination –A sole holder or a sole surviving holder of the bond being an individual can
make a nomination.
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