CORPORATE FINANCE

LONG TERM FINANCE

UDAY KULKARNI FCA, CIA, CISA

DEBENTURES
 Debenture includes debenture stock, bonds
and any other securities of a company.
 Defined as-”Acknowledgement of debt,
given under the seal of the company and
containing a contract for the repayment of
the principal sum at a specified date and for
payment of interest at fixed rate percent,
and it may or may not give the charge on
the assets to the company as security of
loan.”

UDAY KULKARNI FCA, CIA, CISA

DEBENTURES
COMMON FEATURES-
 Credit Instrument- Debenture holder is
creditor of the company.
 Interest Rate- Promise to pay fixed interest
periodically.
 Collateral- Security may be offered.
 Maturity Date- Fixed Maturity date.
 Voting Rights- No voting rights
 Priority In Liquidation.
UDAY KULKARNI FCA, CIA, CISA
DEBENTURES
 Section 117A- Company needs to submit
trust deed for debenture issue.
 Section 117B- Company can not issue a
prospectus or a letter of offer to the public
for debenture subscription unless company
appointed one or more debenture trustees
for such debenture.
 Section 117C- Company shall create
Debenture Redemption Reserve out of its
profit.
 Needs to follow SEBI guidelines for issue.
UDAY KULKARNI FCA, CIA, CISA
DEBENTURES
Important Aspects of SEBI guidelines-
 Chapter VIII & X of the SEBI guidelines

prescribes 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

UDAY KULKARNI FCA, CIA, CISA

DEBENTURES
RBI Guidelines-
 Guidelines for NCD of maturity less than
one year.
 Tangible net worth of company Rs. 4 Crore.
 Credit Rating
 Maturity shall not less than 90 days.
 Denomination, trustee, investment etc.

UDAY KULKARNI FCA, CIA, CISA

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 by
raising debentures.
UDAY KULKARNI FCA, CIA, CISA
DEBENTURES
Disadvantages-
 It increases financing risk- periodic fixed
payment of interest and principal amount.
 The debenture trust deed may contain
restrictive covenants which may not be
favorable to management.
 Fixed repayment commitment should be
met regardless of the liquidity position.
 If company earns rate of return less the
cost of debentures then adverse effect on
EPS.
UDAY KULKARNI FCA, CIA, CISA
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 price
Rs.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)

UDAY KULKARNI FCA, CIA, CISA

INTERNAL ACCRUALS
 Internal Accruals are Retained
Earnings or Reserves and Surplus.
 Section 205 (2A) provides that before
declaration and payment of dividend
company is required to transfer
prescribed percentage of profits to
reserves (not exceeding 10%)

UDAY KULKARNI FCA, CIA, CISA

INTERNAL ACCRUALS
 These are the funds accumulated over
years by the company without distribution.
 It is slightly cheaper source of capital.
 Its generation depends upon dividend
policy of the company.
 It requires to consider Dividend pay out
ration which depends upon-
Liquidity
Growth Plans
Controlling Rights
Contractual Constraints
UDAY KULKARNI FCA, CIA, CISA
TERM LOAN
 From Financial Institutions such as SIDBI.
 From NBFC
 From various types of Banks
 Advantages and Disadvantages same as
per Debt instruments.
 Industry Specific Term Loans are offered.
 Necessity of Credit Rating.

UDAY KULKARNI FCA, CIA, CISA