Convertible debt: Listed companies allowed to raise funds from members

26 Jun, 2022

ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) on Friday issued a regulatory framework for allowing listed companies to raise funds from existing members in the form of convertible debt.

In this regard, the SECP has notified a draft regulatory framework for “issuance of Convertible Debt Securities (CDS) by way of right offer”, for public consultation.

As per SECP, a convertible debt security is a conventional/Islamic debt instrument that yields interest/profit payments and can be converted into a predetermined number of equity shares at a future point in time.

The product is not known and familiar in our local market. However, through this product, Companies can raise debt capital from shareholders without any regulatory impediment. Raising capital without any regulatory impediment would increase the issuance of debt securities over the long run and promote liquidity.

Currently, convertible debt is being issued either by public offerings or by private placements. Under the proposed framework, listed companies would be able to raise convertible debt from existing shareholders.

In India, primary law i.e. Companies Act, 2013 allows a public limited company or a private limited company to issue securities including CDS through Right issue or bonus issue. CDS through right offer are issued as per the normal right issuance regime being followed for equity securities.

The proposed product would enable companies to finance projects in timely and cost-effective manner through existing members and may reduce reliance on other financial institutions and investors. For shareholders, it would provide an additional investment avenue and allow them to earn, while retaining the option to convert debt instrument/sukuk into share capital.

The board of directors would be able to issue CDS among existing members in proportion to the number of shares held at a specific cutoff date, through a term sheet/letter of offer. For this, SECP’s approval would not be required.

In line with the disclosure-based regime, the letter of offer would be placed on Pakistan Stock Exchange (PSX) website for seeking comments from the public and the regulators, if any. Members not interested to subscribe can trade letter of offer at PSX. If 80 per cent of the issue size is not subscribed and the issuer does not have any alternate financing arrangement, the right offer would be cancelled.

Convertible debt securities through right offer is prevalent in multiple jurisdictions and is considered an effective instrument in terms of time and cost compared to other financing modes.

The SECP stated that the regulatory framework does not prohibit the issuance of CDS through right offer. Issuance of CDS through right is a unified mode of raising funds that involves the issuance of CDS, as a right to existing shareholders. Under the subject concept, a company that intends to raise funds in the form of debt specifically convertible debt can offer debt instrument to existing shareholders for subscription.

Copyright Business Recorder, 2022

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