Changes on Pricing of Convertible Instruments

Companies are now free to lay down a formula to transform convertible instruments (like debentures, partly paid shares, preferential shares and the like) into equity in accordance with the guidelines of FEMA and SEBI.

India’s Department of Industrial Policy of Promotion has also relaxed the rules and regulations for convertible instruments to encourage private equity and venture capital deals. Currently, the pricing of capital instruments issued to foreign investors is supposed to be decided upfront, at the time of issuance.

According to investors, this condition restricts them from attaining a higher valuation in case the company performs better than expected. After the revision, the companies will have a choice between specifying the price of convertible instruments upfront and prescribing a conversion formula, so that the investors can get a higher premium if the company does well.

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