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A Right Issue means an offer of securities by an issuer to its shareholders at a particular date, usually in proportion to their existing holdings. You can read more about it in our Rights Issue Article. Although an equity right issue is more common in practice, right issues can either be debt or equity issues.
A Debt Rights Issue (Debentures by right issue) is a process whereby a company offers existing shareholders the opportunity to purchase debentures (a type of bond that pays a fixed interest rate). This might give shareholders an attractive opportunity to earn a return by way of interest and raise funds for the business. An option to convert to equity may be a feature of this type of instrument.
Why Debenture By Right Issue?
When a public company needs additional capital, it may decide to raise funds through its shareholders. However, the company may not always be able to issue additional shares to its existing shareholders, when this occurs, the company has the option to raise debt through its shareholders. The company then issues convertible debt to its shareholders, with the option to convert the debt to equity within a specified time at the instance of the company or the debenture holders.
Debenture by Right Issue VS Right Issue by Shares
| Characteristics | Debenture | Shares |
|---|---|---|
| Ownership | Only after conversion can you become a shareholder | Once additional shares are bought it increases the shareholder’s stake |
| Presentation | It is presented under the liabilities of the company, pending conversion to equity. | It is presented under the company’s equity |
| Voting Right | Does not have voting right | Has voting right |
| Return | Receives interest | Receives dividend |
Advantages
To the Company
It is an effective way for a company to raise capital without immediately increasing its Issued/paid-up capital.
To the Investors
When converted at the specified time, the investor’s shareholding in the company increases.
Disadvantages
To the Company
Until the debenture is converted the company will be required to pay interest and principal to the shareholders even in cases of no profit, depending on the structure of the instrument.
To the Investors
The debenture holders have no voting rights until they convert the debenture to equity at the specified time.
How Can MCL Help?
Meristem Capital Limited acts as a Financial Advisor/Issuing House on capital raising transactions such as a Debenture by Right Issue by advising the Company on the processes, preparing all required regulatory documentation, reviewing same for accuracy and completeness, and liaising with the regulators to ensure speedy and hassle-free approvals, etc., amongst other services that would be provided.
