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CORPORATE FINANCE
LONG TERM FINANCE
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DEBENTURES
Debenture includes debenture stock, bondsand any other
securities of a company.
Defined as-Acknowledgement of debt,
given under the seal of the company andcontaining a contract for
the repayment ofthe principal sum at a specified date and
forpayment of interest at fixed rate percent,
and it may or may not give the charge onthe assets to the
company as security ofloan.
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DEBENTURES
COMMON FEATURES-
Credit Instrument- Debenture holder iscreditor of the
company.
Interest Rate- Promise to pay fixed interestperiodically.
Collateral- Security may be offered.
Maturity Date- Fixed Maturity date. Voting Rights- No voting
rights
Priority In Liquidation.
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DEBENTURES
Section 117A- Company needs to submittrust deed for debenture
issue.
Section 117B- Company can not issue a
prospectus or a letter of offer to the publicfor debenture
subscription unless companyappointed one or more debenture
trusteesfor such debenture.
Section 117C- Company shall createDebenture Redemption Reserve
out of itsprofit.
Needs to follow SEBI guidelines for issue.
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DEBENTURES
Important Aspects of SEBI guidelines-
Chapter VIII & X of the SEBI guidelinesprescribes conditions
for issue of
Convertible Debt instruments. Credit Rating Obtained during
three years
preceding the issue.
Debenture Trustee and duties.
Debenture Redemption Reserve
Dividend Declaration
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DEBENTURES
RBI Guidelines-
Guidelines for NCD of maturity less thanone year.
Tangible net worth of company Rs. 4 Crore.
Credit Rating
Maturity shall not less than 90 days.
Denomination, trustee, investment etc.
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DEBENTURES
Advantages- Fixed cost capital help increase in profits
available for equity shareholders. Company can raise funds
without diluting
control of equity shareholders. After tax cost of capital of
debenture is
lower. Hedge against inflation as interest and
principal repayment amount is fixed. Company can adjust it
capital gearing
debt equity ration by redemption or byraising debentures.
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DEBENTURES
Disadvantages- It increases financing risk- periodic fixed
payment of interest and principal amount.
The debenture trust deed may containrestrictive covenants which
may not befavorable to management.
Fixed repayment commitment should be
met regardless of the liquidity position. If company earns rate
of return less thecost of debentures then adverse effect onEPS.
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DEBENTURES
TYPES
Secured and Unsecured Convertible and Non Convertible Zero
Interest Fully Convertible (ZFCD)-within three years. Zero Interest
Bond (ZIB)
Deep Discount Bond (DDB) i.e. Face value Rs.1 lakh- deep
discount priceRs.2700/- maturity period 25 years. Debt for Equity
Swap Multi-option (Redeemable/Convertible) Bonds Floating Rate
Bonds- Periodical change in interest. Indexed Bonds- safeguard
against inflation.
Warrant attached bonds or Secured Premium Note(SPN)
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INTERNAL ACCRUALS
Internal Accruals are RetainedEarnings or Reserves and
Surplus.
Section 205 (2A) provides that beforedeclaration and payment of
dividendcompany is required to transferprescribed percentage of
profits to
reserves (not exceeding 10%)
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INTERNAL ACCRUALS
These are the funds accumulated overyears by the company without
distribution.
It is slightly cheaper source of capital.
Its generation depends upon dividendpolicy of the company. It
requires to consider Dividend pay out
ration which depends upon-Liquidity
Growth PlansControlling RightsContractual Constraints
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TERM LOAN
From Financial Institutions such as SIDBI.
From NBFC
From various types of Banks
Advantages and Disadvantages same asper Debt instruments.
Industry Specific Term Loans are offered.
Necessity of Credit Rating.
