As per Eighth Schedule of SEBI (Mutual Fund) Regulations method of valuation of convertible debentures is prescribed.
Non-convertible and convertible components are valued separately. A. The non-convertible component shall be valued on the same basis as would be applicable to a debt instrument.
B. The convertible component to be valued as follows: i) Ascertain the following: • The number of shares to be received after conversion. • Whether the shares would be pari passu for dividend on conversion. • The rate of last declared dividend. • Whether the shares are presently traded or non traded/thinly traded. • Market rate of shares on the date of valuation
ii) In case the shares to be received are, on the date of valuation, are thinly traded / non-traded, these shares to be received on conversion are to be valued as thinly traded / non-traded shares.
iii) In case the shares to be received on conversion are not non-traded or thinly traded on the date of valuation and would be traded pari passu for dividend on conversion:
a) Number of shares to be received on conversion, per convertible debenture, multiplied by the present market rate
b) Determine the discount for non-tradability of the shares on the date of valuation.
(This discount should be determined in advance and to be used uniformly for all the convertible securities. Rate of discount should be documented and approved by Valuation Committee. Prevailing interest rate for the similar period could be considered as bench mark for determining the discount) Value = (a)*market rate [1-(b)]
iv) In case of optionally convertible debentures, two values must be determined assuming both, exercising the option and not exercising the option. If the option rests with the issuer, the lower of the two values shall be taken as the valuation of the optionally convertible portion, and; • If the option rests with the investor, the higher of the two values shall be taken.
The entire contents of this article are solely for information purpose and have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation by the Author. Compliance Calendar LLP and the Author of this Article do not constitute any sort of professional advice or a formal recommendation. The author has undertaken utmost care to disseminate the true and correct view and doesn’t accept liability for any errors or omissions. You are kindly requested to verify and confirm the updates from the genuine sources before acting on any of the information’s provided hereinabove. Compliance Calendar LLP shall not be responsible for any loss or damage in any circumstances whatsoever.