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Public Issuance of Convertible Securities

Finsec Law Advisors

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In order to boost the market for public issue of convertible instruments, SEBI released a discussion paper on "Review of framework for Public issuance of Convertible Securities" on December 01, 2015. Although, the existing regulatory structure allows for the public issuance of convertible securities, there have hardly been any issues since the year 2000. One of the reasons is that, currently, convertible securities cannot be issued for a period exceeding 18 months. The paper discusses certain measures to facilitate and revitalise the issuance of convertible securities.

The paper proposes a maximum tenure of 5 years for convertible securities issued by a listed entity. While this is an improvement from the existing scenario, the provision should be flexible to accommodate a greater period. Limiting the tenure to 5 years will militate against corporate and investor choice for an unspecified regulatory benefit. Further, the paper proposes upfront disclosure of the conversion price in the offer document, whether it is pre-fixed at the time of issue or linked to market price at the time of conversion. Furthermore, the paper proposes to allow existing holders of convertible securities to sell the same to the public. This would provide an exit to such holders and help deepen the secondary market for such instruments. Further, the paper provides that optionally convertible debentures and optionally convertible securities of a listed company may be treated as debt and accordingly comply with the SEBI (Issue and Listing of Debt Securities) Regulations, 2008. Further, in case of an unlisted company seeking to make a public issue of compulsorily convertible securities, the paper suggests compliance with the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.

Most of the proposals discussed in the paper, when implemented, will help revive the issuance of convertible securities. However, in our view, the time period for conversion should be guided by commercial considerations and companies should be able to manage their financing strategies in a sensible manner. A suitable regulatory framework will encourage companies to raise funds and entities to invest through convertible securities.