Question

In the capital market environment that we are now, would you invest in hybrid instruments (negotiable or exchangeable)? As a corporation, would you sell exchangeable instruments? Do you perceive conflict between the goals of the investor and the corporation?

Answer 1

a) Given an option to invest, I would invest in hybrid instruments, as it can be considered to be secure from the pure equity instruments as the debt component attached to the hybrid instruments lowers the overall financial risk of investment Eg: Convertible bond gives the option to convert to equity at the same time there is flow of interest.

b) As a corporation, it can sell the exchangeable instruments, because of limited dilution of equity in the initial stages, thus the investor is financially supporting the corporation in the initial without equity. The conversion price in future would be at then value per share, so if the corporation grows the value of shares grows with it too

Thus, also resulting to minimal dilution with value reflecting performance of the corporation and its key persons

c) The ultimate goal of any corporation is to maximise shareholders wealth, whether it be investors or promoters. The investors, also being shareholders, would look to maximise their Return on Investments. The goals can be perceived as similar. However, the corporation's goal may include social expenditure cost as a part of Corporate social responsibility but it never outweighs the ultimate goal.