Sebi proposes new norms for issuance of convertible securities

Suggesting a new set of norms for issuance of compulsorily convertible securities, Sebi today proposed allowing existing investors to sell such instruments to the public besides limiting their tenure to five years.
The proposed changes, once implemented, would provide an additional avenue for entities to invest in companies by way of purchasing convertible securities.
In the discussion paper on 'Review of framework for public issuance of Convertible Securities', Sebi has proposed to "explicitly permit the existing holders of convertible securities to sell their securities to public".
Presently, existing shareholders are permitted to sell their shares to public but there is no specific mention about convertible securities.

The capital market regulator has said that tenure of convertible securities issued to public by an existing listed entity can be a maximum of five years.
Currently, there is no specific provision for tenure of convertible securities issued to public, except for financing of a group company where the maximum tenure is 18 months.

"Presently, whether an issuance can be made on a fixed price basis or through the book building route depends on issuer meeting the specified eligibility criteria. The conversion price may either be pre-fixed at the time of issue or linked to market price at the time of conversion. The disclosure in this regard shall be made upfront in the offer document," Sebi said.

Between 1990 and 2001, the Indian markets saw 284 issues of convertible debentures with a total fund raising of around Rs 14,000 crore, with 57 issues being larger than Rs 50 crore, the markets regulator noted.
However, since 2000 the market for public issue of convertible securities has dwindled.
"Market participants have assigned variety of reasons for the same including popularity of instruments like FCCB, which were permitted since mid-90s, lower tenure for convertible instruments issued in India, higher tax incidence on convertibles as compared to equity, etc," it added.
With a view to revive issuances of convertible securities by existing listed entities and provide an additional avenue for investors to invest as well as companies to raise funds, Sebi has floated the draft paper and sought public comments on the same till December 23.

The final norms will be put in pace after taking into consideration suggestions from the public.
Sebi has suggested same tenure for unlisted company desirous of making a public issue of compulsory convertible securities as well as for Optionally Convertible Debentures (OCDs) and Optionally Convertible Preference Shares (OCPs).
In case an unlisted company is desirous of making a public issue of compulsory convertible securities, Sebi has proposed such firms will have to comply with all the requirements as prescribed under Sebi (Issue of Capital and Disclosure Requirements) Regulations in this regard.
Further, the listing of such securities is proposed to be done on Institutional Trading Platform (ITP).

Sebi has proposed that Optionally Convertible Debentures and Optionally Convertible Preference Shares can be treated as debt.