Chapter 4: Characteristics of Other Securities

Learning Objectives

After studying this chapter, you should understand:

Nature, structure, and operational mechanics of Equity Warrants.
Classification of Convertible Debentures (FCDs, PCDs, and NCDs).
Cross-border capital raising via Depository Receipts (ADRs, GDRs, and IDRs) and ADR levels.
Structure and currency risks of Foreign Currency Convertible Bonds (FCCBs).
Organizational framework, regulatory requirements, and distribution mandates of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).
Categorization, investment thresholds, and strategy profiles of Alternative Investment Funds (AIFs: Category I, II, and III) under SEBI regulations.
Statutory provisions governing Corporate Fixed Deposits under the Companies Act, 2013.

An Equity Warrant is an instrument issued directly by a company giving the holder the right (without the obligation) to purchase equity shares at a predetermined exercise price on or before an expiry date.
Warrants vs. Call Options: Call options are secondary market derivatives between two independent traders that do not affect company capital. Warrants are issued directly by the corporate issuer; when exercised, they create brand new equity shares, increasing paid-up capital and injecting cash into the company.

Fully Convertible Debentures (FCDs): Entire face value converts into equity shares upon maturity; zero cash outflow for the issuer.
Partly Convertible Debentures (PCDs): Split into two parts: convertible portion converts into equity; non-convertible portion (NCD) continues as debt and is redeemed in cash.
Non-Convertible Debentures (NCDs): Pure debt with zero equity conversion feature.

Depository receipts represent shares in a foreign company held in custody by a depository bank:

American Depository Receipts (ADRs): Denominated in USD; traded on US exchanges (NYSE, NASDAQ).
- Level 1: Unlisted / OTC; cannot raise fresh capital.
- Level 2: Listed on NYSE/NASDAQ; full SEC reporting; no fresh capital.
- Level 3: Public offering of new shares to raise fresh capital on US exchanges.
Global Depository Receipts (GDRs): Denominated in foreign currency (USD/EUR); traded on European exchanges (London, Luxembourg).
Indian Depository Receipts (IDRs): Issued by foreign companies to raise capital in Indian Rupees (INR) from Indian investors; listed on Indian stock exchanges.

FCCBs are debt instruments issued by Indian companies in a foreign currency (usually USD) carrying a fixed coupon, convertible into ordinary equity shares of the Indian company at a pre-specified strike price.
Exchange Rate Risk: If the Indian Rupee depreciates significantly and the company's stock price falls below conversion price, investors decline conversion and demand full foreign currency redemption, creating substantial refinancing pressure on the issuer.

Three-Tier Architecture: Sponsor, Trustee, Manager, and SPVs.
Asset Composition: At least 80% of REIT assets must be in completed, rent-generating commercial properties.
Cash Distribution: At least 90% of Net Distributable Cash Flows (NDCF) must be distributed to unit holders at least semi-annually.
Exchange Traded: Units trade continuously on stock exchanges with a minimum lot size of 1 unit.

Regulated under SEBI (AIF) Regulations, 2012:

Category I AIF: High economic priority (Venture Capital Funds, SME Funds, Social Impact Funds, Infrastructure Funds).
Category II AIF: Private Equity (PE) Funds, Debt Funds, Real Estate Funds (no leverage except operational).
Category III AIF: Employs complex or diverse trading strategies (Hedge Funds, long-short equity, quantitative arbitrage; permitted to deploy leverage).
Prudential Standards:
- Minimum investment ticket size: ₹1 Crore per investor (₹25 Lakhs for employees/directors and Angel Funds).
- Maximum 1,000 investors per scheme (200 for Angel Funds).

Governed by Sections 73 to 76 of the Companies Act, 2013.
Non-marketable debt instruments; cannot be traded on stock exchanges.
Tenor Limits: Minimum 6 months, maximum 36 months.
Credit Rating: Mandatory for eligible public companies accepting public deposits.
Deposit Repayment Reserve: Company must deposit at least 20% of deposits maturing in the following financial year into a separate bank account.

Warrants: Company-issued; exercise creates new shares, diluting equity and bringing fresh cash to the issuer.
Level 3 ADR: Enables an Indian company to raise fresh public equity capital from US capital markets.
IDR: Foreign company raising capital in INR from Indian investors; listed on Indian exchanges.
REIT Investment Rule: Minimum 80% in completed, rent-generating commercial assets.
REIT / InvIT Payout: Mandatory distribution of at least 90% of Net Distributable Cash Flows (NDCF).
AIF Minimum Ticket Size: ₹1 Crore per investor (₹25 Lakhs for employees/directors and Angel Funds).
AIF Category III: Only category permitted to use complex leverage and derivatives.
Corporate Deposits Tenor: Minimum 6 months, maximum 36 months.