ISLAMABAD:- The Securities and Exchange Commission of Pakistan (SECP) has issued “Concept Paper” of the issuance of the Convertible Debt Securities (CFS) through “Right Offer” to take feedback from public and other stakeholders.

CDS is a conventional/Islamic debt instrument that yields interest/profit payments and can be converted into a predetermined number of equity shares at future point in time.

Under the Concept Paper, a company that intends to raise funds in the form of debt specifically convertible debt can offer debt instrument to existing shareholders for subscription.

The SECP has laid down process of CDS Right Offer in the concept paper:

The Board of Directors of a listed company will be authorized to take decision to issue CDS through right. The decision of Board of Directors will be communicated to the Pakistan Stock Exchange and SECP same day.

Letter of Offer by the company will be drafted as per regulatory requirement within 10 days of Board resolution.  The Offer Letter will be placed on the website of Pakistan Stock Exchange for comments of stakeholders including public, SECP and PSX

The revised offer letter will be placed on the PSX website addressing comments and incorporating book closure date within 30 days of the Board resolution and within 7 days of closing of comments period.

The Offer Letter to be sent to all shareholders within 7 days of book closure.  Right Offer of the CDS shall be cancelled, if 80 percent of total offer is not subscribed and no alternate financing arrangement is available. If the Right Offer of CDS is undersubscribed than BOD to issue remaining portion 20 percent in such manner as they deem fit.

There will be also additional requirement for issuance of CDS through Right Offer which are being mentioned in the below.

The Issuer can issue the CDS either through execution of Issuance agreement or Trust Deed.

Appointment of Investment agent or Debt Securities Trustee depending upon the structure opted by the Issuer. Prior Requisite approval under section 83(1)(b) of the Companies Act, 2017 for further issue of share capital in relation to conversion of CDS to share capital.

The SECP mentioned seven benefits of CDS through right offer.

  1. Right Offer will make enable to company to less dependence on creditors because company will obtain financial support from existing shareholders instead of obtaining credit from other financial institutions and investors.
  2. The offer will give additional investment avenue as it will provide option to existing shareholders to subscribe debt instrument, which is not possible in case of normal issuance of CDS through public off­ering or private placement mode. It will also allow to the existing shareholders to earn interest, while retaining the option to convert debt instrument into share capital.
  3. The offer will protect investors from impact of dilution in case of conversion.
  4. The Investors can renounce the right of CDS and trade the letter of right of CDS in open market through the offer.
  5. Raising debt capital through right would be more competitive in terms of time and cost as compared to public off­ering or private placement mode.
  6. The product is not known and familiar in our local market. However, through this right offer, companies can raise debt capital from shareholders without any regulatory impediment. Raising capital without any regulatory impediment would increase issuance of debt securities over long run and promote liquidity.  
  7. The right offer will promote the trend of listing because only listed companies can list their CDS without going through the process of public off­ering. This would result in surge in listing of debt instruments over time.

As per the research conducted and available information, issuance of CDS through right is prevalent in countries like India and Malaysia.

The SECP asked to the public and other stakeholders to send their comments through email on or before July 8, 2022.

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