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DEBT FOR EQUITY SWAP

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It is a financial instrument which offers to the Debt holders to exchange the debt with the equity shares of the issuer Company. In other words, the debt holders will be given equity shares in place of their debt to the Company. 

What are the benefits available to the Company?

This instrument reduces the financial burden of payment of fixed interest from the Company. This instrument also reduces the burden of payment of principal amount after certain period (at the time of maturity). However, the issuer faces the risk of dilution of earnings per share by a sharp rise in the equity. 

Special Note: After conversion into equity share capital, the company has the discretionary power to pay dividend to the equity shareholders or not. The Capital is a long – term fund to the Company and is also not payable except some exceptional circumstances like Buy – Back and Delisting of securities. 

What are the benefits available to the Debt holders?

These instruments give an offer to the debt holders to exchange the debt for equity shares of the company. From the investors‟ point of view, there is potential gain from rise in the value of the equity shares but these types of instruments are quite risky for the investor because the anticipated capital appreciation may or may not materialize. However, the dividends are not taxable in the hands of equity shareholders.

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