Вы находитесь на странице: 1из 13

Financial Management

Redeemable Debentures
Redeemable debentures are those that will be repaid by the company under the term of issue at the end of a specified period or at any time within a specified period by giving them a notice of its intention to redeem them at the end of the notice period or by installments during the existence of the company. Redeemable debentures may be reissued even after they have been redeemed until they been cancelled.

Advantages of Redeemable Debentures


Flexibility in capital Structure By issuing such debentures the company can make its capital structure more flexible, and raise funds as and when it needs the loan money. Check on Over capitalization An over capitalized company may redeem such debentures and may control the state of over capitalization. Best solution for Fixed Term Loan If a company requires funds for a fixed period it may issue such debentures because these can be redeemed after a certain specified period. Preferred by Fixed Term Investors These debentures are preferred by those investors who with to invest their funds for a fixed term at a fixed rate of interest and at minimum risk.

Disadvantages of Redeemable Debentures


1. Liquidation of Company Redeemable debentures are repaid at the end of a certain specified period or at any time within the specified period by giving them notice of redemption. If the company fails to arrange the necessary amount to redeem them the debenture holders can take action for its winding up. The companys existence is always at stake if its financial positions is not sound enough. 2. Uncertainty of Redemption If debentures are repayable at any time within a specified period under the terms of issue, it may create a problem before the debentures holders to invest the amount immediately as soon as it is repaid by the company. There remains uncertainty in the minds of debentures holders regarding its redemption. 3. Adverse effect on liquidity of Assets If a company has to repay a large sum at the time of redemption of debentures it may adversely affect the liquidity of assets unless it is planned wisely by creating sinking fund so that the company may get the required amount at the time of redemption of debentures at the end of the specified period.

RIGHTS DEBENTURES Under Section 81 of the Indian Companies Act 1956, there are specific provisions regarding the issue of rights shares by the public companies while no such specific provision has been made regarding the issue of rights debentures. Public companies are authorized to issue such debentures for raising long-term resources. The central government has formulated certain guidelines to regulate the issue of rights debentures by public companies for working capital requirements to be followed by a company, while seeking consent of the controller of capital issue

Advantages of convertible debentures to issuing company


1. Rise in Equity Capital By such issue a company can rise equity capital indirectly without diluting the earnings of the existing shareholders. By the time debentures are converted into shares the additional investment starts earning an added return to support the additional shares. 2. Sale of Shares in Disguise In a period of low market prices of shares the company can sell equity shares in disguise. Investors unwilling to purchase equity shares, initially, may like to convert their debentures into equity shares if they find, it to be a profitable proposition. 3. Attracts Funds from Institutions By issuing convertible debentures, a company can attract funds from the institutions which may not otherwise purchase equity shares due to restriction imposed by their by laws. 4. Tax Advantage As the interest on debentures is a charge on profits, the company gets tax advantage until the bonds are converted into shares. 5. Greater appeal Convertible debentures may have greater appeal among the investors particularly in a period of tight money. The addition of conversion right allows the company to offer comparatively a lower rate of interest in a period when prices of other bonds are falling due to rise in the interest rates. 6. Security for Other Debts As convertible debentures are unsecured and therefore the borrowing capacity of the company remains intact by the issue of such bonds, the company can provide security against its other debts. 7. Flexibility of Capital structure The issue of convertible debentures results in an element of flexibility to the companys capital structure. 8. Double Benefits Convertible debentures offer benefits of both debt financing and equity financing.

Government Guidelines for rights debentures


Govt. concerning rights debentures guidelines are as follows: 1. These may be issued by only public limited companies 2. These may be issued to augment working capital on a long-term basis. Issue of debentures for any other purpose such as financing of expansion project or addition to fixed assets will not fall under this category. 3. The amount of the issue will not exceed 20% of the gross current assets, loans and advances minus the long-term fund currently available for working capital, or 20% or the paid-up share capital, including preference capital and free reserves, whichever is lower of the two. 4. The debt-equity ratio including the proposed debenture issue, should not exceed II. 5. The debenture will carry a rate of interest 10.5% payable half-yearly where the period of maturity is up to and including 7 years and 11% where the period of maturity is from 8 to 12 years. 6. Rights debentures can be issued at a discount or additional interest of % can be offered for any year, if in that year the rate of dividend on equity shares is highest in the preceding three years. 7. Rights debentures will be redeemable as follows: 1. Where the maturity period is upto 7 years, 33 1/3% of the debentures will be repaid uniformly to all debenture holders in the 5th , 6th and 7th year. 2. Where the maturity period is from 8 to 12 years, 20% of the debentures will be repaid uniformly to al the debenture holders in the 8th, 9th, 10th, 11th, and 12th year. 8. The face value of each rights debentures will be Rs. 100 9. Rights debentures will be listed with the stock exchange. 10. The issuing company should be a listed company. Its equity shares must be quoted on the stock exchanges at or above par value in six months prior to the date of application for the issue. 11. Rights debentures shall first be offered to the existing Indian Shareholders of company on a pro-rata basis and there after must be kept open for at least two months. The un-subscribed debentures, if any, will be offered on a rational basis to (a) shareholders interested in taking up additional allotment, (b) the directors of the company, and (c) the employees and business associates of the company.

12. Allotment of Rights Debentures will be made only after a minimum subscription of 75% of the amount of debentures has been secured. 13. The company should ascertain beforehand the prospects of at least 75% of the issue being take up by the shareholders of the company and other categories of investors mentioned above.

Debentures unpopular in India


High Denomination In India, debentures are usually of high denomination, as India investors prefer securities of low denomination, the moderate investors could not go in for them. 2. Managing Agency System Indian industries were financed primarily by the managing agents who generally discouraged the issue of debentures for fear of loosing their financial importance. 3. Heavy Stamp Duty Debentures have been a very costly source of finance with a heavy stamp duty of Rs. 15 for Rs. 1000 for bearer debentures and Rs. 7.50 per Rs. 1000 for registered debentures. This heavy stamp duty generally discourages the investors to invest funds in debentures. 4. Adverse Attitude of Banks Banks and other financial institutions show an adverse attitude towards companies which issue debentures. Banks did not entertain the debentures even as collateral securities. Issuing Companies lose their credit in the eyes of banks and other financial institutions. 5. Limited Marketability For debentures there is no developed, regular and steady capital market in India. To increase the marketability of industrial securities the Government of India have recognized many new stocks exchanges in different part of the country. 6. Adverse effect of Government securities Government of India have issued so many securities with attractive conditions which have adversely affected the popularity of debentures in India. As compared to the industrial securities government securities are considerably safer. Institutions investors have to invest their funds in government securities as per statutory provisions. 7. Unattractive terms of issue Terms of issue of debentures in India are not as attractive as they are in some other industrially developed countries. 8. Lack of Proper Advisory Agencies There is a total lack of advisory agencies investment in India. Stock exchange services are confined to some big cities. Investment trusts and investment banks are not developed in India. Therefore the investor cannot judge where to invest the funds. 9. Lack of Interest to Industrial Investors Institutional investors are statutorily required to invest a large part of their funds in government securities. For example, Indian Insurance Act 1939 prohibits investment in debentures by insurance companies in India. Even to day Life corporation invests its 80% of funds in government securities. Generally Indian banks do not invest in longterm corporate securities. Investment bank and investment trust have not developed much in India. Recently, Unit Trust of India as show some interest in corporate debentures.

10. Cautious Attitude of Indian Investors Indian investors are very cautions about the safety of their investment. They do not wish to earn more at the cost of safety. Only safety of investment attracts them to invest funds in giltedged securities. 11. Preference for Government Savings In recent years Indian government have initiated a number of attractive saving schemes and issued securities which carry income tax rebates and other benefits like withdrawals etc. Marginal investors prefer these schemes rather to invest funds in debentures. 12. Limited Control of Holders Debenture holders are given limited controlling power in the day to day affairs of the company unless their interests are affected. They have no vice in policy decision of the company unless they affect their interest. Hence those who desire to have a voice in the affairs of the company prefer to invest their money in equity shares.

Debt Finance Against Equity Finance


Debt Financing is recommended against equity financing due to following reasons: 1. The rate of interest payable on long terms debt is lower than the normal rate of return. 2. The cost of debt-financing is always fixed. 3. The interest payable on debt is an admissible deduction for income-tax purposes which reduces tax liability of the corporation. 4. Debt carries flexibility in the capital structure of the company because it can be redeemed at any time at the sweet will of the company.

Following are the circumstances of accepting debt capital. (1) The sales and earnings are relatively small (2) The marginal cost of debt is less than the cost of equity as it lower the average cost of capital or trading. (3) The general price level is expected to be high, resulting in higher profits in future. (4) The existing debt-ratio is relatively low. (5) Price earnings ratio on equity shares is low in relation to the level of interest rates. (6) Retention of existing control pattern because debentures carry no voting rights.

(7) Terms of debt-agreement are not burdensome on the cash position of the company. (8) Terms and conditions of debt agreement are not onerous and prejudicial to the interest of the firm and its shareholders.

Depreciation as a source of finance


Depreciation means decrease in the value of assets due to wear and tear, lapse of time, obsolescence, exhaustion and accident. There is a lot of controversy among academicians and business executives regarding treatment of depreciation as a source of funds. People who oppose treating depreciation as a source of finance argue that funds are generated by operating profits and not by making provision for depreciation. If depreciation were really a source of finance by itself any enterprise could have improved its position at will by increasing the periodical depreciation charge. They further argue that the depreciation being a non-cash item of expense does not affect the working capital of the firm and as such not at all a source of finance. Validity of the above arguments cannot be questioned, but it can also not to be denied that as a non-cash expense, depreciation does not represent any cash outlay with the result that a part of the profits adjusted for depreciation can be used by management to increase any of the current assets or pay taxes, dividend etc. Depreciation may, therefore, can be taken as a source of funds in a limited sense because of the following reasons.(i) Depreciation finds its way into current assets through charging of overheads (including depreciation). The value of closing inventory may include depreciation of fixed assets as an element of cost. (ii) Depreciation does not generate funds but it definitely saves funds. For example, if the business had taken the fixed asset on hire, it would have been required to pay rent for them. Since, it owns fixed assets, it saves outflow of funds which would have otherwise gone out in the form of rent.

(iii) Depreciation reduces taxable income and, therefore, income-tax liability for the period is reduces. This will be clear with the following example: Case I Rs. 75,000 Nil. 75,000 37,500 37,500 37,500 Case II Rs. 75,000 15,000 60,000 30,000 30,000 45,000

Income before depreciation Depreciation Income Taxable Income Income Tax say at 50% Net Income after tax (B) Net Flow of funds after tax (A) + (B)

The above example shows that in Case II, the net flow of funds is more by Rs. 7,500 as compared to Case I. This is because on account of depreciation charge being claimed as in expense, tax liability has been reduced by Rs. 7,500 in Case II. It may, therefore, by said that true funds flow from depreciation is the opportunity of saving cash outflow through taxation.

Trade Credit
Trade credit is a form of short-term financing common to almost all types of business firms. As a matter of fact, it is the largest source of short-term funds. In an advanced economy, most buyers are not required to pay for goods on delivery. They are allowed a short-term credit period before payment is due. This credit may take the form of (a) An Open Account Credit Arrangement (b) Acceptance Credit Arrangement. In case of an Open Account Credit Arrangement, the buyer does not sign a formal debt instrument as an evidence of the amount due by him to the seller. While in case of an Acceptance Credit Arrangement the buyer accepts a bill of exchange or gives a promissory note for the amount due by him to the seller. Thus, it is an arrangement by which the indebtedness of the buyer is recognized formally. Trade Credit Arrangement is generally made available to the buyer on an informal basis without creating any charge on assets. Trade Credit Arrangement usually carry stipulation of allowing a cash discount to the buyer for prompt payment. The volume of trade credit and its popularity as a means of short-term financing depends on the following factors. (i) The terms of trade credit, (ii) Reputation of the purchasing firm, (iii) Financial position of the seller, and (iv) Volume of purchase to be made by the buyer.

Merits of trade credit


(i) The major merit of trade credit as a source of finance is its ready availability. (ii) Trade Credit is available on a continuing and informal basis. There is no need to arrange financing formally. In case, the firm is not taking cash discounts, additional credit is readily available by not paying existing trade creditors till the expiry of the credit period. There is no need to negative with the supplier. The decision is entirely up to the firm. (iii) There is no need of creating any sort of charge against firms assets for obtaining the trade credit. (iv) Trade Credit is a flexible means of financing since the firm does not have to sing a note, pledge securities or adhere to strict payment schedule. A seller views occasional late payment with a far less critical eye than a banker or any other lender.

Demerits of Trade Credit


(i) The cost of trade credit may be very high in case all factors are considered. The seller while fixing the selling price of his products to be sold on credit takes into account the interest, the risk and inconvenience attached with

supplying goods on credit. As a matter of a fact, many firms utilize other sources of short-term financing in order to enable them to take advantage of cash discount. (ii) Availability of liberal trade credit facilities may induce a firm to over trading which may later prove to be disastrous for the firm. The firm must balance the advantages of trade credit as a discretionary source of financing without any explicit cost against the cost of losing of cash discount, the possibility of deterioration in reputation, if trade credit is stretched beyond agreed limits and the increased purchase price of the product.

Term Loans
A term loan is a business loan with a maturity of more than one year. There are exceptions to the rule, but ordinarily term loans are retained by systemic repayments over the life of the loan. The primary lenders on term credit are Commercial banks, life insurance corporation, financial institutions, general insurance companies, investment trusts and state and central government. Commercial banks and various financial institutions constitute the hard core of term financing in India. Term lending business of Commercial banks is recent innovation in India specially after 1958. It was in the year of 1958 only when a formal scheme of term loans was started. But, now-a-days these banks provide a larger share of tem finance to Indian Industries.

Special features of term loans


1. Objective The term loans are granted for one or more of the following objectives: (a) Establishment, renovation, expansion and modernization of industrial units. (b) For meeting the requirements of the core working capital.

(c) For retiring bonds in order to reduce interest costs or to redeem preference shares so as to substitute tax deductible interest payment for non-deductible dividends. 2. Security Terms loans are usually secured. They have either a fixed or floating charge against the assets of the company. The lender bank usually prefers a first charge, however, in appropriate cases it accepts a second charge also. 3. Time period The term loans are granted for a period ranging from 1 to 15 years but generally from 8 to 15 years. The repayment is made in installments typically designed to fit the project capacity of the borrower to pay. The repayment starts 2 or 3 years after sanctioning of loan. The lending institution requires payment only in accordance with the specified schedule so long the borrower carries out his commitments under the loan agreement. In case of default in such commitment, the agreement provides for accelerating of the maturity of the loan. 4. Formal agreement The term loan is granted on the basis of a formal agreement. The agreement contains the terms of granting loan and provides for certain protective clauses for the benefit of the lender, e.g. limiting the dividend rate, the power to appoint directors, conversion of loan into share capital, etc. Then terms are settled through direct negotiation between the borrower and the lending institutions. 5. Participation basis- In case of term-loan being a substantial amount, different financial institutions participate in the credit on a syndicated basis. Such participation is done either because restrictions or for sharing the risk. The larger the loan, greater is the participation. 6. Introduces financial discipline Term loans introduce a proper financial discipline in the borrower. He has to forecast reasonable accuracy cash flows so that he can repay loan and interest as per the agreed schedule. This makes necessary for the borrower to prepare a projected cash flow statement. 7. Refinance facility Commercial banks are granted refinance facility from Industrial Development Bank of India on the terms loans granted by them. The risk, of course, continues of the lending commercial bank. 8. Project oriented approach Financial institution engaged in term lending do not do security-oriented lending any longer. They have detailed app of each project and asserts its own merits. The loan is sanctioned only when the project satisfies their tests. 9. Special Conditions In order to provide safeguards against time and cost overruns the loan agreements usually require the borrower to give undertaking in respect of the following matters : (i) (ii) (iii) No further long-term loan shall be taken The debt-equity ratio will not exceed the specified limit. Current ratio will be maintained at the desired level.

(iv) Selling commission sole selling agent shall not be disbursed unless interest and installments of loans are paid.

(v) rate.

Dividend shall not be declared for a specific period or shall not exceed the agreed

(vi) Financial data and other information as required by the lending institution will be supplied as and when desired. (vii) The directors will furnish personal guarantees for repayment of the loan in addition to the financial institutions charge on firms assets.

Credit Rating Information & Services of India (CRISIL)


(a) The Credit Rating Information & Services of India Limited (CRISIL) was set up by the financial institution on January 19, 1998, to facilitate the processing of proposals and giving of approvals by the SEBI for companies going to the public for raising funds through issue of securities. Share Capital : CRISIL has a capital base of Rs. 4 crores. Functions: CRISIL has proved to be a boon to both companies and investors through its following functions: (i) It provides an independent and unbiased report about the creditworthiness of company. Thus, it enables it to mobilize directly savings from individuals at reasonable cost. (ii) It provides reliable financial information and increased disclosure to investors. Thus, it enables them to buy securities with confidence.

Working: At present CRISIL is restricting its rating only to debt instruments, viz., fixed deposits, debentures, and debenture portion of equity linked debentures. There is no compulsion for any company to obtain or publicize the rating obtained from CRISIL. However, once credit rating is made compulsory by the Government. CRISIL is planning to undertake credit rating of all types of securities. CRISIL has to evaluate and monitor the performance of a company through use of qualitative as well as quantitative criteria for evaluation. The qualitative criteria include the companys competitive position, its strengths and weakness, its management and business strategies, etc. while the quantitative criteria include the financial statements the accounting ratios, the cash flow and funds flow statements of the company concerned.

Progress of CRISIL, Since its inception till March 31, 1996, CRISIL has so far completed rating of 1,736 issues consisting of various types of debt Rs. 1,14,873 crores. Some of the companies which have used CRISIL rating are Indian Petro Chemicals Limited (IPCL), Sundaram Fiannce Limited (SFL), Mahindra Engine Steel Company Limited, Mukand Oil & Steel works Limited, Kirloskar Bros. Limited, Municipal Bonds of Ahmedabad Municipal Corporation etc. During the year 1992-94 CRISIL launched the RATINGDIGEST, which is a compilation in five volumes of CRISIL Rating Reports organized by industries categories. In 1995 96 it introduced CRISIL 500 Equity Index. Credit rating analysis is relatively, new development in India. It is expected that establishment of CRISIL, will provide a strong impetus to the systematic risk evaluation of specified corporate instruments as well as the companies issuing them.

(a) ICRA Ltd. ICRA formally known as the investment Information & Credit Rating Agency of India (ICRA) was promoted by the Industrial Finance Corporation of India (IFCI). It was incorporated on Jan. 16, 1991 as public limited company and started functioning with effect from September 1, 1991. The ICRA also performs credit rating functions and finalizes its rating norms and standards in consultation with Credit Rating Information & Services of India Ltd. (CRISIL) ICR A has an authorized Capital of Rs. 10 crores. Industrial Finance Corporation of India (IFCI), Unit Trust of India, Life Insurance Corporation of India, General Insurance Corporation of India, Housing Development Finance Corporation of India, Infrastructure Leasing and Financial Services, State Bank of India, and 17 commercial banks are its shareholders.

Progress of ICRA, Since its inception till end of March, 1996 ICRA has rated 778 debt instruments involving an amount of Rs. 93,380. The Government has already announced compulsory rating for all debentures end bonds expect the following :

1. Issue of non-convertible debentures upto Rs. 5 crores on private placement basis including with mutual funds. 2. All issues of fully convertible into equity shares within 18 months from the date of issue at per determined price. 3. Public sector bonds and private placement of debentures with financial institutions banks.

Вам также может понравиться