CD is neither new nor esoteric. On the contrary, it is widely known to the corporate world. Now, more than ever before, is the time to bring it out of the closet and sweeten it further. The legendary Dhirubhai Ambani was so enamoured of it that he went overboard and converted into shares even debentures that were issued as plain vanilla debentures. Anil Ambani would not have drawn flak for overpricing Reliance Power shares on IPO had he tapped funds from public through the CD route.

Ever since the bourses have been on a song, CD has seized to excite our promoters who are more excited about landing something more attractive — equity at mind-boggling premium which neither is repayable nor required to be compulsorily serviced. But now that the chips are down and the public refusing to be taken for a ride, companies wanting to access public funds will willy-nilly have to do so through CDs. Indeed CD is what the doctor has ordered for them.

Conceptually, CD is designed for companies that have a long gestation period during which equity would naturally be shy. That Reliance Power, which belongs to this genre, got over this obstacle is more a reflection of the gung-ho mood then.

A company which has a bright distant future but a bleak present and near future is the ideal candidate for CD because it is a win-win proposition for both the company and the investors.

Till such time its projects or products go on stream, it can keep the investors happy by paying periodic interest which understandably would be less than the one carried by a vanilla debenture.

It is at the point of commencement of commercial production that investors in pure equity would be enthused.

Therefore at this point of time the company that has issued CD should make public offer of shares may be within the framework of the existing norms but with a condition that the investors in CD would be rewarded with a sizeable discount — say 20-40 per cent — with reference to the price charged from the investors in equity if they choose to exercise their convertibility option.

Such a sweetener would be a just reward to those who bankrolled the company during its salad days and saw it through difficult times. Moreover, all these days they have got a lower rate of interest vis-À-vis the plain vanilla debentures. This is the second justification for such an attractive discount. And the third rationale is the CD subscribers have virtually provided the venture capital assistance during the infancy of the company.

Additionally, a further option should be given to those who were not interested in exercising the convertibility option on the eve of public offer of shares — to exercise the option anytime before the maturity of the debenture at a concessional price vis-À-vis the prevailing market quotations.

The fence sitters obviously should be rewarded with a lesser discount in percentage terms vis-À-vis those who cast their lot with the company when its shares were unknown quantities.

At any rate, CD should not be compulsorily convertible — an obnoxious feature in quite a few CDs issued in the past that somehow passed regulatory scrutiny, thanks to a permissive regime.

The SEBI (Securities and Exchange Board of India) should pull all stops to popularise such a CD scheme. Some of the novel features suggested herein may be at odds with the current dispensation on CD. Suitable modification may therefore have to be made so that CD is restored to its pride of place which it deserves.

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