Sources Finance

of

Long

Term

Abhilashita Rao

Sources market
1. 2.

of

funds

in

domestic

Equity Pref. Capital

1.

Debentures

Cumulative Non Cumulative Convertible Convertible Non Convertible Partly Convertible

1. 2. 3.

Term Loans Equipment Leasing Internal Accruals

Sources of Funds in global markets

1.

Depository Receipts External Commercial Borrowings Foreign Currency Convertible Bonds

2.

3.

Features of Equity

Equity is perpetual The rate of dividend is not fixed Equity shareholders are owners of the company and have voting rights The various types of equity issues are:
Public issue Rights issue Private placement Bonus issue (does not lead to inflow of cash for issuer)

Debentures

Debentures are classified as debt in the issuers balance sheet. For debentures with a tenor of greater than 18 months , credit rating is mandatory. The rate of interest is fixed Debenture holders do not have voting rights In case of convertible debentures, the principal is not redeemed on maturity, but is converted into equity shares.

Preference capital

Preference capital generally has a fixed tenor, however it may also be perpetual. The rate of dividend is fixed The claims of preference shareholders on the issuer are greater than the claims of ordinary shareholders.

Global Capital Markets ADR/GDR

Benefits to the Issuer :

Greater Visibility Diversified Investor Base Access to capital without bearing currency risk ADR/GDR proceeds can be used for cross border acquisitions and investments in subsidiaries/JVs overseas.

DR Issue Process
1.

Issuer Company issues underlying equity which is held by the Custodian Bank Depository Bank issues foreign currency denominated DR s to investors as per pre determined ratio.

2.

Two way fungibility

ADR/GDR can be converted into underlying shares and sold in Indian market. Based on instructions recd. from overseas investors, a broker in India can purchase shares of an Indian company for conversion into DR s.

FCCB Borrowing in global market

1.

FCCB s are quasi debt instruments, and can be converted into equity at a pre determined strike rate, if the investor chooses to do so Like DR s, FCCB s are classified as FDI and hence are subject to sectoral caps. Some FCCB s have a call provision, which enables the issuer to go in for early redemption. FCCB s can be secured or unsecured. Redemption is possible at par, premium or discount. In case of Zero Coupon Bonds, the holder is primarily interested in gains due to conversion. Credit rating is not mandatory. The coupon on FCCB s is generally 30 40 % lower than that in case of com parable ECB s

2.

3.

4.

5.

6.

7.

Restrictions proceeds
1. 2.

on

utilization

of

ECB

Permitted Heads:
Import of capital goods For lending to self help groups in case of Micro Finance Institutions Investment in JV or WOS abroad

3.

Prohibited Heads:
1. 2. 3.

Investment in working capital Repayment of rupee loans Investment in capital market or real estate (except for development of integrated townships)

RBI caps on cost of borrowing

In case of bonds with maturity of 5 years or less, the cost should not exceed 300 bps above 6 month LIBOR. For bonds with longer maturity, cost should not exceed 500 bps above LIBOR.

ECB Volumes in 2009

Quarter Amt in million USD

Jan Apr Jul Oct -

Mar Jun Sep Nov

2943.5 2712.0 4614.2 4939.4