DISCUSSION: MANAK C. GUPTA.

There have been several studies reported in the literature dealing with the valuation and the determinants of the premium on convertible bonds, see [1,2,3,5]. The phenomenon of liquidation of the convertible bonds seems to have received relatively scant attention and the theorists and practitioners alike are hard pressed to find cogent rationale for the voluntary conversion of convertible bonds. Once the share price exceeds the conversion price the holder of the convertible bond faces the decision either to convert it into shares or hold on to it until a later date. The paper by Mehta attempts to offer a rationale for this voluntary conversion of the convertible bonds taking place gradually over a period of time. He provides empirical data to indicate that voluntary conversion of convertible bonds does take place in the market and that it is gradual over time. After analyzing a number of possible reasons for voluntary conversion of the convertible bonds the author concludes that because of uncertain growth in share prices, the (convertible bond) CB holders hedge their position by selling the call option and where the price subsequently goes up they close their position by converting the CB assuming that this would be cheaper than the alternative of selling the CB and buying the shares in the market with the associated transaction costs and tax considerations taken into account. The paper rules out other motives of CB conversion such as the interest/dividend differential on the CB and its underlying equity on the grounds that it would be inconsistent with the gradual voluntary conversion of the CBs over time. The paper argues that voluntary conversion of CB can best be explained in terms of market imperfections and two of these imperfections considered by the author are taxes and transaction costs. [ABSTRACT FROM AUTHOR]