Capital Increase Without Pre-emptive Rights III

Okay, in the previous discussion we have covered the two criteria for an eligible debt to equity conversion being part of the Capital Increase Without Pre-emptive Rights. One being the type of company that is allowed to do the debt to equity conversion, second is the type of debt that can be converted and as to whether the interest, coupon and penalty from the debt is part of the amount eligible for conversion.

Now in this session, I am going to cover the determinant for the conversion price.

One thing to also note in the debt to equity conversion when performing this capital increase without pre-emptive rights is to consider how much debt that can be converted into share and by how many shares. The debtor has the interest of making sure his money worth as many shares as possible while the creditor prefers to part way with as little shares as possible. The good news is, there is a mechanism to address this.

The other thing to consider is the share price of the company. In any typical scenario, normally the share price of this kind of company is pretty low and as one can imagine, the lower the share price of such public company, the more shares the creditor have to forgo its shares to the party it owes to in order to pay down the debt. This in turn will result in higher dilution effect to the other existing shareholders.

Due to this dilution effect and in order to mitigate minority shareholders being unnecessarily worse off due to the conversion as well as to regulate the conversion mechanism, poin V.1.1 of IDX Rule No. 1-A stipulates that the conversion price must not be lower than the average 25 days of the share price in the stock market before the EGM is conducted.

On the conversion price, we also need to note whats the Corporate Law has to say about it. Article 33 of the prevailing rule says that the share issuance for the paid-in capital of a company must be paid in full amount. With such requirement that the share issuance must be paid in full, then it requires both parties to make sure that the conversion is done at least equal to the nominal value of the share as stated in the company's article of association. From here, we can conclude that the conversion price must be either the average share price of 25 days prior to the EGM or the nominal value of the share whichever is higher. If it happens that the average 25 day share price is lower than the nominal value of the share, then we should use the nominal value.


thats all for now, folks! be back with another topic which is the shareholders' approval for this corporate action.

Cheers
SS