ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) Wednesday guided investors that any company except a single member company and company not having share capital is allowed to issue convertible debt securities.
In light of SECP’s commitment to promote capital formation and educate potential issuers and investors about different modes of financing and investment avenues, a Guidance Paper detailing mechanics and elements for issuance of Convertible Debt Securities (CDS) has been published.
The SECP said that the convertible debt security is a hybrid instrument having both debt and equity features. Initially it is a fixed-income security that yields interest payments and subsequently can be converted into specified number of equity shares. The conversion from debt security to shares can be done at certain times during the instrument’s life and is usually at the discretion of the security holder/ investor. Investors in CDS can benefit from a steady income stream (payment of coupon/profit rate) and repayment of principal at maturity, while retaining the option to share in potentially higher equity values i.e. if the conversion option is exercised.
There is a global surge in issuance of CDS due to low cost involved. Approximately $92 billion of convertible securities have been issued in first half of calendar year 2020. However, Pakistan has not witnessed CDS issuances by the public listed companies barring few banks that used these instruments for meeting their tier I and tier II capital requirements.
The Guidance Paper mainly covers, features of CDS, its benefits to investors, opportunities for issuers, criteria for issuance of these and steps involved. As a part of capital market development, SECP will be conducting webinars for creating awareness among potential issuers and other stakeholders relating to issuance of CDS.
According to the SECP guidelines, the investors in convertible debt securities (CDS) can benefit from a steady income stream and repayment of principal at maturity, while retaining the option to share in potentially higher equity values. The bond-like characteristics of convertible debt securities provide downside price support i.e. investor will receive the full investment at maturity and coupon/interest/profit payments (if any) at regular interval, while embedded equity option provides upside potential i.e. if conversion into equity share is exercised. Under normal market conditions, convertible securities provide investors with a risk profile similar to that of similarly rated non-convertible debt securities and returns comparable to those of equities.
Copyright Business Recorder, 2021
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