Convertible Debentures Quotes

Ivar and Lee Higginson decided to have International Match issue new securities called convertible gold debentures. “Debenture” was just a fancy term for “bond” – debentures were a fixed claim on interest payments by the corporation plus a return of the principal amount on the maturity date, which in this case would be twenty years. Debentures had a limited upside, but were safer than shares. These “gold” debentures were safer still, because they were payable in either dollars or gold, at the holder’s option. If International Match became bankrupt, holders of debentures would be repaid first, before shareholders received any money. These debentures gave investors the right to receive annual interest payments of 6.5 percent from International Match, an attractive rate at the time.

International Match debentures were quoted at $129, a high level for a security that would repay just $100 in eighteen years. The price was so high because of the conversion right. According to Berning “practically all debenture holders” had converted into common shares.15

Now that Ivar had converted his debentures into more flexible obligations, he was free to plan his future monopoly-for-loan transactions without a ticking clock. He had added to his track record of impressive returns for investors by giving American holders of gold debentures 5 percent more money than they expected, faster than they expected it. And he had demonstrated to Lee Higginson, and other bankers, that he was a sophisticated financier. The bankers were impressed by his new recapitalization technique.

You could issue two classes of stock—class A and class B. The public would get class Bs, which would carry one vote per share. The founders and inner circle, and your convertible debenture holders, would get class As, which would entitle them to name three-quarters of the board of directors. In other words, you raise enormous sums of money, turbocharge your growth, but ensure that you keep control.

In contrast, FCDs or fully convertible debentures, are converted on a predetermined date at a fixed price and the investors get interest at regular intervals till the date of conversion into equity.

NRIs are allowed to invest in non-convertible debentures (NCDs) of an Indian company.

Before wrapping up this chapter, let us look at one of the deadly scams in the Indian primary market history. There was company named ‘MS shoes east’. Shares of this company traded in Rs 150-200 range throughout the year 1994. But towards December 1994 it spurted to Rs 500 without any justifiable rationale behind the raise. Its promoter Pavan Sachedeva and his broker artificially manipulated the stock price to this level.   By February 1995, the company devised an expansion plan for an estimated expense Rs 700 crores. It proposed to raise around Rs 428 crores by means of Fully convertible bonds. These bonds were to be sold at Rs 199 each through public issue. The idea was to provoke people to subscribe the issue with a hope of converting this bond of Rs 199 to a share of Rs 500.   Well, his brokers was constantly buying the stocks from the open market to maintain the price at that high level. But the situation had already worsened. He had bought too much and had too little money at hand that he could not pay the stock exchange for all the purchases he made. BSE could not give money to the sellers of that security. Things turned out to be serious. You may find it hard to believe  - the BSE was shut down for three consecutive days without any business.   Before this drama came to light, FCD ('Fully Convertible Debenture) public issue was a big success and it almost stole the show. Delighted by the overwhelming response from the investing community, MS Shoes had announced to close the public issues few days before the stipulated time. The world came to know that the cruel plan of manipulating the stock price was only to push the bond issue successfully. Even the authorities woke up to the problem. The company was issued a notice. And also it allowed the investors to take back their FCD application. Almost all the investors took back. Even the underwriter refused to buy the unsold portion of the issue because the company had voluntarily announced to close the issue before the end date. The ruling was in favor the underwriter. Sachedeva declared himself to be innocent. MS shoes office resembled a mourning house with  deserted look.   There was one Sachedeva who came to light. There were and probably still are more of them out there.

NRIs are allowed to invest in equity shares or convertible debentures of companies under the Foreign Direct Investment (FDI) scheme