Unit I

A Debenture is a debt security issued by a company (called the Issuer), which offers to pay interest in lieu of the money borrowed for a certain period. In essence it represents a loan taken by the issuer who pays an agreed rate of interest during the lifetime of the instrument and repays the principal normally, unless otherwise agreed, on maturity.

Issuers point of view

Provide a good source of finance for a company and is beneficial to the investors. Finance is available for a fixed period with certainly and thus the company can adjust its investment plans suitably by taking into account the funds available. To meet the requirement of long-term capital. Maintaining ownership(as Creditors) To reduce the burden of tax. To maximize earning per share Reduction in cost of capital Maintaining optimal capital structure/ to use leverage in the capital structure of the company. Debenture help in mobilization of savings from public particularly from those investors who are risk aversive.

Investors Point of view Get preference over Shareholders. Have first claim for returns as well at the time of Winding up. Mobilization of savings from public particularly from those investors who are risk aversive. Fixed payment even in loss

Issuers point of view Creates the obligation for the payment of interest . Create burden for fixed payment even in loss. Too much debt increase cost of capital Makes firm/Company risky
Investors Point of view Creditors of Company not owner No profit sharing Dont have voting rights or participation in AGM

On the basis of Security Secured/Mortgage Unsecured On the basis of Convertibility Fully Convertible Partial convertible Optional Convertible Non Convertible

On the basis of Coupon rate Zero Coupon Specific Coupon / rate On the basis of Registration Registered Bearer On the basis of redemption/Tenure Redeemable Non Redeemable/Irredemable / perpetual On the basis of priority First Second

Debentures issued for cash Debentures issued for consideration other than cash Debentures issued as collateral Security

Debentures may be issued 1. At par 2. At premium 3. At discount

1. Support from investment institutions is adequately available. LIC, UTI, GIC and others have been in field to invest public funds in the debenture issues; 2. Emergence of institutions acting as trustees for debentures holders have reposed confidence in the investing public for the security of their money and safeguard of their interest as creditors;

3. Institutional underwriters, merchant banks in public and private sector have come up to render successful underwriting services to the investor as well as the needy companies;
4. Investors preference to high yielding securities with minimum risk has encouraged issue of debentures by the companies.

5. Cost of raising money through debenture is minimum as against the cost involved in other sources of finance;
6. Debenture issuing company is obliged now to create a debenture redemption fund to protect the interest of debenture holders.

ADR GDR Foreign Bonds FCCB External Commercial Borrowings FDI FII

It is an instrument traded at exchanges in the US representing a fixed number of shares of a foreign company that is traded in the foreign country.
The ADR route enables companies to raise funds in the U.S. financial markets, provided they meet the regulatory norms for disclosure and accounting.

A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas.

Issuing company issue Ordinary shares should be listed. The issued ordinary shares or bonds should be delivered to DCB(Domestic custodian bank) DCB instructs ODB(Overseas depository Bank) to issue GDR/ADR certificates to non- resident investors against the shares in DCB GDR may be listed on any international stock exchange for trading outside India.

Sources to raise fund in foreign Country Extension to available financial Sources. To fulfill fund requirement Protect from domestic economic /Financial fluctuations Gives opportunity to have benefit of Exchange rate fluctuations Create goodwill for the company

Can be listed on any of the overseas stock exchanges/OTC/Book entry transfer system Freely transferable by non resident They can be redeemed by ODB The ODB should request DCB to get the corresponding underlying shares released in favour of non resident investors.(Share holder of issuing company)

 Global depository receipt or global depositary receipt (GDR) is

a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account. GDRs represent ownership of an underlying number of shares.

It is a negotiable instrument which is denominated in some freely convertible currency. A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches.

Global depository receipts facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets.
Prices of global depositary receipt are often close to values of related shares, but they are traded and settled independently of the underlying share. Indian companies are allowed to raise equity capital in the international market through the issue of GDR/ADRs/FCCBs. These are not subject to any ceilings on investment. Several international banks issue GDRs, such Chase, Citigroup, Deutsche Bank, Bank of New York. GDRs are often listed in the the London Stock Exchange as JPMorgan

Luxembourg Stock Exchange and in

Sources to raise fund in foreign Country Extension to available financial Sources. To fulfill fund requirement Protect from domestic economic /Financial fluctuations Gives opportunity to have benefit of Exchange rate fluctuations Create goodwill for the company

A bond issued by a foreign borrower in the currency of the country in which it is sold. or A bond that is issued in a domestic market by a foreign entity, in the domestic market's currency. Examples include Yankee bonds (US dollar denominated bond issued by a foreign borrower in the US), Samurai bonds (issued in Japan and denominated in yen) and Bulldog bonds (issued in the UK in sterling). A foreign bond is most often issued by a foreign firm to raise capital in a domestic market that would be most interested in purchasing the firm's debt. For foreign firms doing a large amount of business in the domestic market, issuing foreign bonds is a common practice. Foreign bonds are regulated by the domestic market authorities

Foreign Currency Convertible Bonds commonly referred to as FCCB's are a special category of bonds. FCCB's are issued in currencies different from the issuing company's domestic currency. Corporate issue FCCB's to raise money in foreign currencies. These bonds retain all features of a convertible bond making them very attractive to both the investors and the issuers.

These types of bonds are attractive to both investors and issuers. The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock by Convertibility. for the company, thereby reducing its debt-financing costs.

An external commercial borrowing (ECB) is an instrument used in India to facilitate the access to foreign money by Indian corporations and PSUs (public sector undertakings).
ECBs include commercial bank loans, buyers' credit, suppliers' credit, securitized instruments such as floating rate notes and fixed rate bonds etc., credit from official export credit agencies and commercial borrowings from the private sector window of multilateral financial Institutions such as International Finance Corporation The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along with Reserve Bank of India, monitors and regulates ECB guidelines and policies.

External Commercial Borrowings (ECB) are defined to include commercial bank loans, buyer's credit, supplier's credit, securitized instruments such as floating rate notes, fixed rate bonds etc., credit from official export credit agencies, commercial borrowings from the private sector window of multilateral financial institutions such as IFC, ADB, AFIC, CDC etc. and Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds

Applicants will be free to raise ECB from any internationally recognized source like banks, export credit agencies, suppliers of equipment, foreign collaborations, foreign equity - holders, international capital markets etc.

Foreign direct investment (FDI) is a direct investment into production or business in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country.
Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds.

An investment made by a company or entity based in one country, into a company or entity based in another country.
Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies.