Sep 21, 2019

Convertible securities

Convertible Securities

Convertible securities are those securities which can be and/or should be converted into other securities, which are generally the issuer’s common stock. A convertible security is a hybrid security which has conversion features, i.e., it can be converted into some other securities. Usually, conversion is carried by authorization from the option holder, but conversion is mandatory in mandatory convertible securities. Convertible securities are often convertible preferred stocks and/or convertible bonds which are issued by companies and can be converted into common stock of issuing company.

Features

1) Convertible securities which are also called hybrid securities, in addition to conversion into stocks, have debt feature too

2) Existence of the option of conversion into stocks lead to reduction in the expected rate of convertible securities, hence ease and reduction of financing cost of enterprises and ultimately increased profit bearing for the issuer

3) The aim of offering convertible securities is that when some people are doubtful about certain shocks, they can convert their claims into stocks within a specified period

4) Convertible securities are issued as provided in the articles of association or upon resolution adopted by the extraordinary general meeting (EGM)

5)  Issuance of both types of convertible securities will, in all likelihood, lead to increase in the number of shareholders hence increase in the company’s capital

4) Terms and conditions of replacement of convertible securities with stocks are determined and declared upon issuing

7) Due to existence of information asymmetry, convertible security is a proper mechanism for reduction in improper selection

8) Due to existence of conflict of interests between shareholders and managers and also between holder of convertible securities and shareholders, utilizing convertible securities as a financial instrument may cause reduction in agency costs

9) The result of experimental researches show that the companies which have been financed through convertible debts show more financial and operating flexibility

10) Enjoyment from guaranteed risk-free profit on one hand, and enjoyment of privilege of contingent increase in the value of stock until maturity on the other hand will lead to attraction of investors of different tastes; therefore, facilitating financing