As we all knows that money is the life blood for a business. In business money is called capital or finance or fund. Nobody can image even for a small business without money. Here we will talk with reference to business. In business money is provided by the entrepreneur of the business, who is the owner of the business, in any one or both the way of the following:
i. From own generation which means the owner will provide his money by way of equity or loan or in other form to run the business or the owner will decide through the instrumental body called as (Board of Directors or members of the Company) to issue Equity shares which is called owners capital considering the equity capital is a permanent source of capital.
ii. From Borrowing which means the owner will not provide his money to run the business but he will provide fund by arranging from others moneylenders like friends, Sharaf, Banks, Financial Institutions general public etc., which may be in the form of Preference shares, Debenture, Bond, Deposit, Loan or in any other form but it is not permanent nature it is returnable at the fixed time as may be fixed at the time of issue in case other than loan and in case of loan at the time of signing of the loan agreement.
The following are the type of debt instruments which includes Preference Shares, bonds, Notes, debentures and Receipts which are available in the Domestic Market as well as in the International Market.
A Preference share is the share which has preferred right of pre fixed Dividend and repayment of the principal amount in case of liquidation of the Company than an Equity share.
The following are the type of Preference share which can be issued:
- Redeemable Cumulative fully convertible Preference shares
- Redeemable Cumulative Partly convertible Preference shares
- Redeemable Cumulative Non convertible Preference shares
- Redeemable Non-Cumulative fully convertible Preference shares
- Redeemable Non-Cumulative Partly convertible preference shares
- Redeemable Non-Cumulative Non convertible Preference shares
The above Preference shares can be issued either Participating or non Participating right.
A Bond is an instrument which represents a debt of the issuing party according to the contract under which the bond is issued up to the date of repayment and at the pre fixed charges which is called ‘interest” payable as per the contract of the issue. The bond may or may not be secured (but now a day secured Bond is issued) having charge on the asset of the issuing party which is enforced in the event of default made by the issuing party in repayment of the Principal amount at the time of maturity or payment of interest due.
Bearer Bonds are the bonds which are similar to the share warrant in that the bearer bonds are freely negotiable, transferrable by delivery. The way of payment of interest is different in this type of bonds. The interest is paid by way of coupon attached with the bond. On maturity, of the bonds the principal money is paid to the bearer of the bond.
Registered Bonds are the bonds which are at the time of maturity paid to the person whose name appear in the Register of bond holders. These bonds are freely transferable in the same way as shares.
Redeemable Debentures are issued for the specific time period. On the expiry of the said time period the issuer has the right to redeem the bonds are to the principal money and dues to the bonds holder as per the terms of the issue and get the Properties released from Charges if such denatures are secured.
Irredeemable or Perpetual Bonds
Unlike redeemable bond irredeemable bonds which are also called as ‘Perpetual Bond’ are the bonds which are not redeemed during the life of the issuer. If the terms of the issue of such bonds contains that in case of certain events of circumstances happen the bonds may be redeemed in such case the bonds are redeemed if the certain events of circumstances as per the terms of issue happens. Now a days Irredeemable or Perpetual Bonds are not issued.
Generally, Bonds are issued as secured bonds having securities by way of mortgage and charge on the assets of the issuer. However the bonds may be issued without mortgage or charge on the assets of the issuer. Such bonds are called as ‘Naked Bonds’ or may also be called as ‘Unsecured Bonds’.
Bonds issued as security for a loan
Bonds may be issued for securing the loan borrowed or to be borrowed by the bond issuer in the terms of loan agreement. The main purpose of the issue of such type of bonds is to give secondary security to the lender of the loan securing them to get realized the assets of the issuer in the event of nonpayment of loan moneyat the proper time or according to the terms ofloan agreement. Such securities may be called as ‘Collateral Security for loan’. The nominal value of the bonds is always more than the loan amount to secure interest and other charges of whatever nature as may be due in respect of the bonds. When the loan is fully repaid the bonds so issued will be automatically redeemed.
Secured Bonds means the Bonds in which the issuer of a bond offers security to the bond holders over its whole of the property present and future to secure the principal money of the Bond holders along with interest and charges. The Bond holders of such bonds can realize their money in the case of default on the part of the bond issuer. Such bonds are called as ‘Secured Bonds’.
Non Convertible, Fully convertible, Partly convertible, Optionally convertible bonds
When a bond is issued without any condition relating conversion that, it will be converted in to equity share on the expiry of the specific time period after the issue of the same such bonds are remain as bonds till the expiry of its terms of issue as per the agreement of issue of such bonds. Such Bonds are called Non convertible bonds.
When a bond is issued with a condition relating conversion that, it will be fully converted in to equity share on the expiry of the specific time period after the issue of the same such bonds are converted in to equity shares on the expiry of its terms of issue as per the agreement of issue of such bonds. Such Bonds are called fully convertible bonds.
When a bond is issued with a condition relating conversion that, it will be partly converted in to equity share on the expiry of the specific time period after the issue of the same such bonds are partly converted in to equity shares and partly remains as bonds on the expiry of its terms of issue as per the agreement of issue of such bonds. Such Bonds are called partly convertible bonds. Generally, such type of bonds are issued in two parts viz Part ‘A’ and part ‘B’ part ‘A’ is non convertible part which remains as bond and part ‘B’is converted in to equity shares after the expiry of the specified periodin accordance with the terms of the agreement of bond issue.
When a bond is issued with a condition relating conversion that, it will be partly converted in to equity share on the expiry of the specific time period after the issue of the same such bonds are partly converted in to equity shares and partly remains as bonds on the expiry of its terms of issue as per the agreement of issue of such bonds. Such Bonds are called partly convertible bonds. Generally, such type of bonds are issued in two parts viz Part ‘A’ and part ‘B’part ‘A’ is non convertible part which remains as bond and part ‘B’is converted in to equity shares after the expiry of the specified periodin accordance with the terms of the agreement of bond issue.
Like debenture a bond is an instrument which represents a debt of the issuing party according to the contract under which the bond is issued up to the date of repayment and at the pre fixed charges which is called ‘interest” payable as per the contract of the issue. The bond may or may not be secured (but now a day secured Bond is issued) having charge on the asset of the issuing party.
All the above instruments are ancient conventional debt instruments however; there are some following new debt instruments in the market which a borrower may use to make available funds from the market.
Zero Interest Bond (ZIB)
Like name of the Bond the bond is issued at discount from their eventual maturity value and has zero interest. When the bond is repaid after specified date at the face value the difference between the issue price and repayment price is a gain to the investors on the bond. The investors are not entitled to have any interest on the bond. They are entitled to have the principal money repaid to them on the maturity period.
Secured Premium Notes (SPN)
The SPN is an instrument which carries along with detachable warrant against which the holder of the SPN can get equity share(s) after affixed period of time. The SPN have feature of medium to long term notes.
Deep Discount Bond (DDP)
The IDBI issued DDB for the first time. The DDB is issued at discounted price from its face value and on the expiry of the specified period of time for which the DDB are issued say 15 years or 25 years the DDB are redeemed to face value. The DDB appreciates its face value over a maturity period of 15 years or 25 years. The unique advantage of DDB is the elimination of the investment risk. It allows the investor to lock in the yield to maturity or withdraw from the scheme periodically say after every 5 years from the date of issue.
The mail advantage of the DDB is the difference between issue price and maturity value will be treated as capital gain is the investor sells the Bonds on the stock exchange.
Zero Coupon Convertible Note (ZCCN)
ZCCN is an instrument which can be converted in to the equity share of the issuer if the investor wishes to choose for the same. If investor chooses to have the ZCCN converted in to equity share of the issuer the investor will have to forego all the accrued and unpaid interest on the ZCCN. Generally the ZCCN be put to the issuer.
Multi –Option secured redeemable convertible debentures:
Where a debenture gives the holder thereof two or more different options it may be called multi option debentured. It is a type of debentures. It is essential that the debentures in character and is secured and redeemable and or convertible in to equity shares. Their chief feature is the multiple-options available to the investors.
A callable Bond is a bond which can be called in and pay off by the issuer of the bond at the price stipulated in the bond contract. The price the issuer must pay to retire a callable bond when it is called it terms as ‘Call price’ .The main advantage of this bond is the issuer can call the bond when the market is sufficiently lower than the bond coupon rate. Usually the issuer cannot call the bond for a certain period after issue.
Option tender Bonds:
The option tender bonds are the Bonds which give right to the holder thereof to sell back their bond to the issuer normally at par.
Some businesses are able to raise long term money because their debts are guaranteed; usually by their parent Company. In some instances the State Government guarantee the bond issued by the State Government undertakings and Corporation.
Subordinated debentures are unsecured debt junior to all other debts. All other debts must be fully paid off before the subordinated debenture holders receive anything. As per the Financial Management concept higher risk higher return this type of debt will have a higher interest rate then the senior debt and will frequently have the right of conversion in to the equity shares.
Floating Rate Bonds
Like its name the rate of interest payable on such bond changes periodically depending upon the market rate on the gilt-edged securities. These bonds are also called as ‘Adjustable Interest Bond’ or variable rate bonds.
Junk bonds are high yield securities due to this reason the bonds are widely used as source of finance inn take over and leverage buyouts. The firm having low credit rating is usually willing to pay 3 to 5 per cent more than the high grade corporate debt compensate for the greater risk.
Fixed income and fixed sum repayments are not economic in the time of rapid inflation. Index Bond is the financial instruments which not only retains the security and fixed income of the debenture but which also provide some safeguard against inflation.
Stepped up debentures
The terms of issue of the stepped up debenture contains that instead of making the conversion at one go at the end of the tenure, it has designed the instrument in such a way that the equity component is augmented gradually. For example, the stepped up debentures has been priced at the face value of Rs. 50, with a coupon of 18% p.a. interest is payable half yearly, and the tenure is of 3 years from the date of issue. The conversion will be done at par value in 3 phases at the end of first year 20% and 40% at the end of second and third year.
Inflation Adjusted Bonds(IABs)
Inflation Adjusted Bonds are the Bonds which promise to repay both the principal and interest, by floating both these amounts upwards and downwards in line with the movements in the value of the specified index of the Commodity.
Like name in Coupon stripping the major mechanism is separation of the principal part and interest part of an ordinary Bond and the same can be sold separately to the investors. The Coupon stripping can also be known as ‘Just strips’. This instrument is very popular in the developed money market.
Initially the process of issue of the bond is the similar to that of the other bond issued by either any Corporate or Government. Later, according to the requirement received from the primary investor the bond is stripped in principal and interest part and so that the same can be sold in the mark again.
This stripping results in two different securities, one from the principal part and other from the interest part. The principal part portion is structured as Zero Coupon Bond (ZCB) which is issued and traded on discount and redeemed on face value at the maturity. The interest part can be structured as a ZCB or any other any other structured instrument.
Commercial Paper (CP)
Commercial paper is a debt instrument for the short term borrowing which enable highly rated corporate borrowers to diversify their source of short term borrowings and provides an additional financial instrument to investors with freely negotiable rate of interest. The CP issued for the period ranging from 3 months to less than 1 year. The CP can be issued by companies either directly to the investors or through bank / merchant banker. A company can issue CP only if:
- Its tangible net worth less than Rs. 4 crore as per the latest audited balance sheet.
- Its fund based working capital limit not less than Rs.4 crore.
- Its has obtained the specified minimum credit rating by the approved credit rating agency and the rating should not be older than 2 month at the date of issue of the CP.
- Its borrowal account is classified as ‘standard’ by the financing bank.
- It has minimum current ratio of 1.33:1 as per the latest audited balance sheet and the classification of current liabilities is in conformity with the Reserve Bank of India guideline issued from time to time.
The CP can be issued in physical form or in dematerialization form also.
Euro issue in Euro Bond
The terms itself denotes that the issue is made abroad through the currency denominated in foreign currency and the issue is listed on any overseas stock exchange. Euro issue is mechanism of mobilizing of resources in foreign currency required by a Company. Euro issue is different from foreign issue. In Euro issue the issuer is not incorporated in the country in which the security is being issued. Euro Bond denotes issuer ineptness in foreign currency in which the Bond is issued. For issuing secured bond by giving securities on the immovable properties of the issuer situated in India permission of the Reserve Bank of India is required.
Foreign Currency Convertible Bond (FCCB)
The Bond issued in accordance with the Scheme and subscribed by the non -resident in foreign Currency and Convertible in to Ordinary shares of the issuing Company in a manner either in full or in part on the basis of only equity related warrants attached to the debt instruments. The FCCB is issued in accordance with the Guideline of the External Commercial Borrowing (ECB) issued by the Reserve Bank of India.
The FCCB is almost like the convertible debentures issued in India. The Bond has a fixed interest or Coupon rate and is convertible into certain number of shares at a pre fixed price. Till the conversion the issuer will pay interest on the FCCB in foreign currency if the holder does not accept option of conversion the redemption money will be paid in foreign currency. Usually the FCCB is issued unsecured however, it is issued as a secured by giving securities on the immovable properties of the issuer situated in India permission of the Reserve Bank of India is required
Global Depository Receipt (GDR)
A global depository receipt is a an instrument in the form of depository receipt or certificate created by any Overseas Depository Bank outside India issued in Dollar to nonresident investors against the issue ofordinary shares or FCCB of the issuing Company.
GDR is an instrument denominated in dollar or in some other freely convertible foreign currency. On conversion in to share or Bond the same will be in Indian currency.
American Depository Receipts (ADRs)
A foreign Company might make issue in U.S. by issuing securities through appointment of Bank as Depository. By keeping the securities issued by the foreign Company the U.S. Bank will issue a receipt which is called “American Depository Receipt” (ADRs) to the investors. It is a negotiable instrument recognizing claim on foreign securities. The holder of ADRs can transfer the instrument as in the case of the domestic instrument and also entitled for the dividend as and when the same is declared. The holder of ADRs can ask to the Bank for the original foreign security by exchanging the ADRs.
Multiple Currency Bonds (MCBs)
In certain Bonds option is given to the holder thereof to claim payment of coupon or principal in currencies of their option. The bond holder may choose payment of coupon in one currency and payment of principal money in other currency. The exchange rate is fixed at the time of issue. Another feature of this bond is conversion into instrument denominated in one currency and conversion of bond into the instrument denominated in another currency.
Syndicated credits have emerged as one of the important sources of finance in the international Market. In these types of credits, lenders usually form as syndicate and will pool the funds they provide medium terms finance ranging from 3 to 7 years. The rate of `interest is generally fixed on LIBOR plus basis.
Yankee Bond is sold in the United States, denominated in US dollars but, the Bonds are issued by the borrower outside of the United State having different nationality. This allows a US citizen to buy a bond of a firm but received all payment in U.S. Dollars, eliminating the exchange rate risk. Similar bond from other countries would include the ‘Bull dog Market ’which involves British sterling denominated bond issued by non British firms, or ‘Samurai Market’, which involves yen denominated bonds issued by non Japanese issuer.
Alpine convertible is an alternative in the hand of the companies who are scouting for the funds from the overseas market. Alpines makes an entry into the Country through the three major Swiss Banks viz. Swiss Banking Corporation (SBC), Credit Swiss (CS) and Union Bank of Switzerland (UBS).
Europe Medium Term Notes (EMTNs)
The medium term notes are continuously issued notes, which are usually unsecured with maturities ranging from nine months to ten years. Under EMTNs the borrowers are allowed to e flexible with maturities profile and timing of issue. These MNTS are useful tool for treasury management. The borrowers ie., the issue of MNTs includes sovereign government as well as large companies and financial institutions.