In light of the commitment of the Securities and Exchange Commission of Pakistan (SECP) to promote capital formation and educate potential issuers and investors about different modes of financing and investment avenues, a Guidance Paper detailing the mechanics and elements for the issuance of Convertible Debt Securities (CDS) has been published.
This paper is available on the SECP’s website and can be accessed here.
A 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 a 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 the repayment of principal at maturity while retaining the option to share in potentially higher equity values if the conversion option is exercised.
There is a global surge in the issuance of CDS due to the low costs involved. Approximately $92 billion of convertible securities were issued in the first half of the calendar year 2020.
However, Pakistan has not witnessed the issuance of CDS by the public listed companies, barring a few banks that had used these instruments to meet their tier I and tier II capital requirements.
The Guidance Paper mainly covers the features of the CDS, its benefits to investors, opportunities for issuers, criteria for their issuance of these, and steps involved.
As a part of capital market development, the SECP will be conducting webinars to create awareness among potential issuers and other stakeholders related to the issuance of CDS.