Page 44 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes
Example: Let us look at the Jindal issue:
The total issue was 301,72,080 secured zero interest fully convertible debentures. Of these
129,30,000 FCDs of 60 each were offered to the existing shareholders of the company as right
basis in the ratio of one FCD for every one fully paid equal share held as on 30th March of the
year. The balance of 172,42,080 secured zero interest, FCD’s were offered to the public at par
value of 100 each.
The terms of conversion were: Each fully paid FCD’s will be compulsorily converted into one
equity shares of 10 each at a premium of 90 per share, credited as fully paid up, at the end of
12 months from the date of investment.
Partly Convertible Debentures (PCDs)

These are debentures or bonds, a portion of which will be converted into equity share capital
after a specified period, whereas the non-convertible part (NCD) of PCD will be redeemed as
per terms of the issue after the maturity period. The non-convertible portion of the PCD will
carry interest upto redemption whereas the interest on the convertible portion will be only upto
the date immediately preceding the date of conversion.
Normally, PCDs carry a lower rate of interest (coupon) as compared to NCDs.
This is a kind of NCD with an attached warrant that gives the holder the right for allotment of
equity shares through cash payment. This right has to be exercised between certain time frame
after allotment, by which time the SPN will be fully paid up.

3.2.5 New Financial Instruments

 Non-voting shares: Useful for companies to increase net worth without losing management
control. These stocks are similar in every respect to equity, the sole exception being the
absence of voting rights.
 Detachable equity warrants: This gives the holder the right to purchase a certain number
of shares (equity) at a specified price over a certain period of time (of course holders of
warrants earn no income from them, till the option is exercised or warrants are sold).
Warrants are often attached to debt issues as ‘sweetener’. When a firm makes a large bond
issue the attachment of stock purchase warrants may add to the marketability of the issue
and lower the required interest rate. A sweetener’s warrants are similar to conversion
features often when a new firm is raising its initial capital suppliers of debt will require
warrants to permit them to participate in whatever success the firm achieves. In addition,
established companies, offer warrants to debts to compensate for risk and thereby lower
the interest rate/and/or provide for fewer restrictive covenants.
 Participating debentures: These are unsecured corporate debt securities that participate in
the profits of the company. Potential issuers are existing dividend paying companies
could appeal to investors willing to take risk for higher returns.
 Participating preference shares: Quasi equity instrument to bolster net worth without loss
of management control payouts linked to equity dividend and also eligible for bonus will
appeal to investors who are willing to take low risk.
 Convertible debentures with options: A derivative of the convertible debentures, with an
embedded option, providing flexibility to the issues as well as the investor to exit from
the terms of the issue. The coupon rate is specified at the time of issue.
 Third party convertible debenture: Debt with a warrant allowing the investor to subscribe
to the equity of a third firm at a preferential price vis-à-vis the market price. Interest rate
here is lower than pure debt on account of the conversion option.

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