Corporate Finance

ASSIGNMENT

TOPIC
Issue of Convertible Debt Securities

Submitted By:
Hisham
15BLA1008
 Synopsis

In this project we will be analysing the issuing of convertible debt securities and the
regulations provided by law for the same in India. The project will first elucidate what are
debt securities, and are equity securities. After that the project will explain convertible debt
securities in light of the aforementioned types of securities, after which the project will deal
with the matter of regulation of the issue of convertible debt securities in India, analysing the
various aspects of issuing of convertible debt securities in India given under the Securities
and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations,
2018, the eligibility conditions and criteria for the same, and will also go into the circumstanes
when a company cannot issue convertible debt securities.
 Introduction

Debt security normally refers to a debt instrument, such as a government bond, corporate
bond, certificate of deposit , municipal bond, or preferred stock, that can be bought or sold
between two parties and usually has basic terms defined, such as amount borrowed, interest
rate, and maturity and renewal date. Debt securities may either be protected by collateral or
may be unsecured. The holder of a debt security is typically entitled to the payment of
principal and interest, together with other contractual rights under the terms of the issue, such
as the right to receive certain information.

Equity securities represent a claim on the earnings and assets of a corporation, while debt
securities are investments into debt instruments. For example, a stock is an equity security,
while a bond is a debt security. When a person buys a bond, they are, in essence, loaning
money to the company, and they have the right to be repaid the principal and interest on the
bond. On the other hand, when a person buys stock from a company, they are essentially
buying a piece of the company i.e if the company profits, the person who bought the stock
profits as well, but if the company loses money, the stock also loses money. In the event that
the company goes bankrupt, it pays bondholders before shareholders.

Issue of Convertible Debt Securities in India

Convertible debt securities are a hybrid type of instrument that combine some of the
characteristics of both debt and equity securities. In India, issue of convertible debt securities
is regulated by the Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2018, under which convertible debt securities are instruments
which create or acknowledges indebtedness and is convertible into equity shares of the issuer
at a later date at or without the option of the holder of the instrument, whether constituting a
charge on the assets of the issuer or not1. Convertible debt instruments can be offered by the

1 Regulation 2 (1) (j), Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018
company either through Initial Public Offer2, or through Further Public Offer3.

Issue Through Initial Public Offer

The eligibility requirements given under the regulations for issue of convertible debt
instruments through Initial Public Offer for any company are that the company shall be
eligible to make an Initial Public Offer of convertible debt instruments even in the case of no
prior public issue of its equity shares and listing thereof, with the main condition to be
satisfied for the company to issue such instruments being that the company should not be in
default of payment of interest or repayment of principal amount in respect of debt instruments
issued by it to the public, if any, for a period of more than six months 4.

If any company satisfies the aforementioned condition, then it may make anInitial Public
Offer of convertible debt instruments, if it also satisfies the following criteria:
1. the company has to obtain credit rating from at least one credit rating agency5
2. the company has to appoint at least one debenture trustee in accordance with the
provisions of the Companies Act, 2013 and the Securities and Exchange Board of India
(Debenture Trustees) Regulations, 19936
3. the company has to create a debenture redemption reserve in accordance with the
provisions of the Companies Act, 2013 and rules made thereunder7

Moreover, if the company issuing the convertible debt securities through Initial Public Offer
proposes to create a charge or security on its assets in respect of secured convertible debt
instruments, it should also make sure sure that the said assets are free from any encumbrances
and sufficient to discharge the principal amount at all times 8. The redemption of the

2 Part II, Chapter II, Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018
3 Part II, Chapter IV, Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018
4 Regulation 9, Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations,
2018
5 Regulation 10 (1) (a), Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018
6 Regulation 10 (1) (b), Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018
7 Regulation 10 (1) (c), Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018
8 Regulation 10 (1) (d), Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
convertible debt securities should be in accordance with the terms of the offer document
stipulated at the time of the Initial Public Offer of the convertible debt securities9.

In case where a security is already created on the said assets in favour of any existing lender
or security trustee, or the issue of convertible debt instruments is proposed to be secured by
creation of security on a leasehold land, the consent of such lender or security trustee, or lessor
for a second or pari passu charge has been obtained and submitted to the debenture trustee
before the issue of the convertible debt securities10.

Furthermore, the regulations also stipulate that a company usually cannot issue convertible
debt instruments through Initial Public Offer for financing or for providing loans to or for
acquiring shares of any person who is part of the promoter group or group companies, unless
the company issues convertible debt securities that satisfy the following criteria:
1. the said debt instruments should be fully convertible debt instruments, and
2. the period of conversion of the said debt instruments should be less than eighteen
months from the date of issue of the said debt instruments11.

Issue Through Further Public Offer

The eligibility requirements given under the regulations for issue of convertible debt
instruments through Further Public Offer for any company are that the company shall be
eligible to make a Further Public Offer of convertible debt instruments if its equity shares are
already listed, with the main condition to be satisfied for the company to issue such
instruments being that the company should not be in default of payment of interest or
repayment of principal amount in respect of debt instruments issued by it to the public, if any,
for a period of more than six months12.

Regulations, 2018
9 Regulation 10 (2), Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018
10 Supra note 8
11 Regulation 12, Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations,
2018
12 Regulation 106, Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018
If any company satisfies the aforementioned condition, then it may make a Further Public
Offer of convertible debt instruments, if it also satisfies the following criteria:
4. the company has to obtain credit rating from at least one credit rating agency13
5. the company has to appoint at least one debenture trustee in accordance with the
provisions of the Companies Act, 2013 and the Securities and Exchange Board of India
(Debenture Trustees) Regulations, 199314
6. the company has to create a debenture redemption reserve in accordance with the
provisions of the Companies Act, 2013 and rules made thereunder15

Moreover, if the company issuing the convertible debt securities through Further Public Offer
proposes to create a charge or security on its assets in respect of secured convertible debt
instruments, it should also make sure sure that the said assets are free from any encumbrances
and sufficient to discharge the principal amount at all times16. The redemption of the
convertible debt securities should be in accordance with the terms of the offer document
stipulated at the time of the Further Public Offer of the convertible debt securities17.

In case where a security is already created on the said assets in favour of any existing lender
or security trustee, or the issue of convertible debt instruments is proposed to be secured by
creation of security on a leasehold land, the consent of such lender or security trustee, or lessor
for a second or pari passu charge has been obtained and submitted to the debenture trustee
before the issue of the convertible debt securities18.

Furthermore, the regulations also stipulate that a company usually cannot issue convertible
debt instruments through Further Public Offer for financing or for providing loans to or for
acquiring shares of any person who is part of the promoter group or group companies, unless
the company issues convertible debt securities that satisfy the following criteria:

13 Regulation 107 (1) (a), Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018
14 Regulation 107 (1) (b), Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018
15 Regulation 107 (1) (c), Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018
16 Regulation 107 (1) (d), Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018
17 Regulation 107 (2), Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018
18 Supra note 16
 1. the said debt instruments should be fully convertible debt instruments, and
2. the period of conversion of the said debt instruments should be less than eighteen
months from the date of issue of the said debt instruments19.

Conclusion

From the above, it is clear that according to the Securities and Exchange Board of India (Issue
of Capital and Disclosure Requirements) Regulations, 2018, any issuing company will have
to satisfy the conditions and criteria mentioned under the regulations, both in the case of Initial
Public Offer and Further Public Offer for it to be eligible to issue convertible debt securities
in India. Even in case a company might satisfy the condition and criteria under Regulation 9
and Regulation 10 for Initial Public Offer, and Regulation 106 and Regulation 107 for Further
Public Offer, it may still not be able to issue convertible debt securities in some cases as given
under Regulation 12 and Regulation 110.

19 Regulation 110, Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018
 References

 Sebi.gov.in
 Investopedia.com