Equity instruments, Financial Management

QUASI-INSTRUMENTS

These instruments are considered as debt instruments for a time-frame and are converted into equity at the option of the investor (or at company's option) after the expiry of that particular time-frame. The examples of these are Warrants, Foreign Currency Convertible Bonds (FCCBs), etc. Warrants are normally issued along with other debt instruments so as to act as a ‘sweetener'.
FCCBs have a fixed coupon rate with a legal payment obligation. They have greater flexibility with the conversion option, at the choice of the investor, to equity. The price of the conversion of FCCB closely resembles the trading price of the shares at the stock exchange. Also, the company may incorporate a ‘call option' at the choice of the issuer to obtain FCCBs before maturity. This may be due to the adverse market conditions, changes in the shareholding pattern, changes in tax laws, etc.

A Euro Convertible Bond is issued for investments in Europe. It is a quasi-equity issue made outside the domestic market and provides the holder with an option to convert the instrument from debt to equity. An added feature nowadays is to allow conversion of Euro Convertible Bonds into GDRs. Till conversion, interest is paid in US dollars and bond redemption is also done in US dollars; thus, while the investor would prefer the convertible bond as an investment instrument, the issuing company tends to prefer a GDR. An investor can exercise the conversion option at any time or at specified points during the convertible life. The investor exchanges the convertible bond for a specified number of shares.

 

Posted Date: 9/10/2012 5:23:36 AM | Location : United States







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