Stipulation and Exercise of Convertibility Options by Financial Institutions

The Dutt Committee suggested that when public sector financial assistance in any significant scale is provided, the project should necessarily treated as belonging to ‘joint sector’ with proper representation for the state. It also suggested that to bring about the concept of ‘joint sector; in operation the financial institutions should insist on the whole or a part of their assistance in the form of loans and debentures being convertible into equity at their option. This study is designed to analyse their experience with respect to (i) stipulation of convertibility option (ii) decision criteria used for the exercise of option and related problems, and (iii) suggest alternative decision criteria which can incorporate risk and uncertainty involved in decision to convert or not to convert in case of profitable and loss making companies at the time of decision making. On the basis of analysis and findings several recommendation are presented to maximize gains from the exercise of convertibility options. Gains from convertibility option will, however, be limited because a large number of assisted companies which will be coming up for convertibility decision are not expected to achieve profitability or achieve profitability which is not alternative vis-a-vis lending rates. Even in case of those companies which turnout to be profitable, another constraining factor would be the large amount of holdings of investment institutions (which will continue to invest in profitable companies). This will restrict the actual amount of conversion within the total amount subject to conversion.