The Securities and Exchange Commission of Pakistan (SECP) has notified the draft regulatory framework for ‘issuance of Convertible Debt Securities (CDS) by way of right offer’, for public consultation.
The regulatory framework provides mechanics through which listed companies can raise funds from existing members in the form of convertible debt.
Currently, convertible debt is being issued either by public offerings or by private placements. Under the proposed framework, listed companies would be able to raise convertible debt from existing shareholders.
The proposed product would enable companies to finance projects in a timely and cost-effective manner through existing members and may reduce reliance on other financial institutions and investors. For shareholders, it would provide an additional investment avenue and allow them to earn, while retaining the option to convert debt instrument/Sukuk into share capital.
The Board of Directors would be able to issue CDS among existing members in proportion to the number of shares held at a specific cutoff date, through a term sheet/letter of offer. For this, SECP’s approval would not be required.
In line with the disclosure-based regime, a letter of offer would be placed on Pakistan Stock Exchange (PSX) website for seeking comments from the public and the regulators, if any. Members not interested to subscribe can trade a letter of offer at PSX. If 80 percent of the issue size is not subscribed and the issuer does not have any alternate financing arrangement, the right offer would be canceled.
Convertible debt securities through the right offer are prevalent in multiple jurisdictions and are considered an effective instrument in terms of time and cost compared to other financing modes.
The process flow for issuance of CDS through right is covered in detail in draft regulatory framework and concept note available at SECP’s website.