Fm Debenture

FIN A N C IA L M A R K E T

M O N EY M A R KET

C A P ITA L M A R K E T

SHORT TERM FUNDS MATURE ONE YEAR OR LESS

EQUITY/ORDINARY SHARE OWNERSHIP

DEBTS

CAPITAL SHARE HOLDER

TERM LOANS ØFINANCIAL INSTITUTE ØINITIAL MORTAGE MORE THAN YEAR

DEBENTURES/ BONDS vBORROWED SUM MONEY PROMISES TO REPAY

SECURITISATIO N

ØHOMOGENEOUS ILLIQUID FINANCIAL ASSETS (RESIDENTIAL MORTAGE ) INTO MARKETABLE SECURITES

DEBENTURES/BONDS/NOTE S 

COMPANEY HAS BORROWED CERTAIN SUM OF MONEY AND PROMISES TO REPAY IT IN FUTURE UNDER DEFINED TERMES

• Trust Indenture – Indenture/Trust Deed – Financial Institution/Bank/Insurance Company

• Interest – – – –

Fixed rate of interest Legal binding/ enforceable Annually/ semi-annually/ quarterly Floating rate of interest • Bank rate, maximum rate on term deposit, interest

• Maturity – Indicates the length of time for redemption of par value mostly 7-10 years

• Redemption Process – Debenture redemption reserve • Maturity period 18 months • 50% before commencement

– Call and put provision • Redeem the debenture • Call price – 5% • Call premium

– Security • Immovable assets of the company(equitable mortage) 

D EB EN TU R E Q U IT Y C O N V E R S IO S H A R E ES N • Convertibility – Convert Into Equity Share At A Specified Premium & Date – Fully Convertible Debenture (FCD) • Zero Interest Rate • Lower Than The Normal NCD

– Partial Convertible Debenture (PCD)

• Non convertibility – Specified equal installment 

• Credit rating – Timely payment of interest redemption of principal by a borrower – CRISIL, ICRA, CARE, FITC-INDIA

• ADVANTAGE – industry • Lower cost due to lower risk and taxdeductibility of interest payment • No dilution of control as debentures do not carry voting right

– Invertors • Stable return & fixed maturity • Preferential claim on the assets • • • •

• Disadvantage – Company • Restrictive covenants in the trust deed • Legal enforceable – obligation – Interest & repayment – Cost equity

– Investor • No voting right • floating interest rate •

Zero Interest Bonds/ Debentures • Zero coupon bonds/ debentures • No interest rate • Discount in the maturity value  gain on investment = face value – acquisition price  

 

acquisition price = maturity value/ (1+i) ^n I rate of interest n maturity period

Deep Discount Bonds (DDB) • Issue at a deep/ steep discount over its face value – IBDI sold in 1992 DDB of face value of 1 lakh at a deep price of Rs 2700 with period of maturity Years 5 20 25

Face value 5700 50000 100000

Secured Premium Notes (SPN)

• Secured debenture at a premium over the face value • Lock-in period (no interest) • After lock-in period investor can sell back • Redemption made in installments    



TISCO in 1992 issued SPN Par Value is 100 Lock-in period 3 years Maturity 4-7 years duration

Premium 37.5 25 50

Interest 37.5 50 25

Floating Rate Bonds • Interest is not fixed • Floating interest depends on – Interest on treasury bills – Bank rate – Maximum rate of term deposits

• Protection against inflation risk to investors,  particularly banks and financial institutions