To revive the issuance of convertible securities, the primary market advisory committee (PMAC) of SEBI has recommended that listed entities may issue compulsorily convertible securities for a maximum of five years. Currently, there is no such cap. These are securities which have features of both debt and equity.
The holder of such a security can convert it into equity and benefit from it if the company issuing the security performs well. However, if the issuer does not perform according to expectations, the security holder has the option of redeeming the security at a predetermined maturity date.
Outlining this in the form of a discussion paper on Tuesday, SEBI said holders of convertible securities should also be allowed to offload their holdings to the public akin to equity shares. The other issue raised in the discussion paper is whether convertibles should be priced according to market price, pre-fixed price, or price discovered through book-building.
The final issue raised in the discussion paper is the treatment of these instruments — whether they be treated as debt and be classified under SEBI’s debt regulations or as equity and be required to comply with SEBI’s regulations relating to equity issuances.
Between 1990 and 2001, there were 284 issues of convertible debentures by small, medium and large companies with a total fund raising of about ₹14,000 crore. However, since 2000, the market for public issue of convertible securities has dwindled due to popularity of instruments such as foreign currency convertible bonds, lower tenure for convertible instruments issued in India, and higher tax incidence on convertibles as compared to equity.