While market intermediaries continue to find innovative ways for luring the retail investor back to the capital market, providing an exit route to the investor seems to be on top of the agenda.
In a detailed note submitted to the capital market watchdog, the Association of Merchant Bankers of India (Ambi) has suggested that the Securities and Exchange Board of India (Sebi) should permit companies to come out with the first issue of optionally convertible debentures(OCD). The note adds that there is a need to provide protection of the principal amount invested by the small investor and reasonable return on the same to bring him back to the capital market.
In case of compulsory convertible debentures, the investor has no choice but to convert the debenture into equity at a pre-determined price and hence such investment is in the nature of an equity investment. In view of the compulsory conversion clause, investors are forced to convert their debentures even if the market price of the equity shares is far below the conversion price.
Market intermediaries opine that the instrument of optionally convertible debenture offers certain inherent advantages to the investor and protects their interest. The investors, in such instruments, are protected as they have the option of non-conversion and redemption at the end of the tenure of the instrument. This gives investors a pre-determined rate of interest along with the principal amount invested by them.
The association has also listed out advantages of allowing such an instrument. The main one being that companies would be forced to perform against the promises made in order to ensure the conversion of debentures into equity. The conversion price could be realistic to ensure the conversion of debentures into equity.
The principal amount invested by the investor would be protected which will regain the confidence of the investor in the capital market. It is also felt that all decisions relating to minimum subscription should be left to the discretion of the board of directors.
Analysts also feel that confidence building measures have to be taken to bring back small investors back to the investment fold. This can also be done by bringing in more disclosures in the offer document. The alternative arrangement made for meeting the shortfall between the issue size and the minimum subscription should be disclosed in the offer document.
Besides this, in case the financial projections are given in the offer document, the implications of opting for the alternative arrangements of financing should be disclosed in the document.
The provisions relating to the minimum subscription should be a part of the Companies Act but it should be included in Sebi's guidelines on disclosure and investor protection. In fact, the entire provisions and schedules in the Companies Act relating to prospectus and offering of securities to the public should be within the ambit of Sebi regulations.
Ambi has also suggested that the financial statements need to be presented in greater depth. For example, the Securities Exchange Commission in US has prescribed different forms for different types of companies and offerings. There details differ for real estate firms, investment companies, companies where employees offer is present, oil and gas units, bank holding companies, limited partnerships and so on.
For instance, the disclosure requirement for oil and gas companies require information on reserve reports to other agencies, production, undeveloped acr-eage, present activities, delivery commitments and each of these heads are also explained in detail for descriptive and statistical information.
With large core projects likely to come up in the next few years, it is imperative that investor confidence improves as these projects would have to tap the capital market for funds.
