Equity vs.

Debt – An Overview

Particulars Debt Equity

Investors are eligible for assured returns

on their investment through interest and Returns on equity investments cannot be
Assured returns
redemption premium, both of which can assured.
be legally assured.
Interest payments can be a tax Dividend paid and stock buyback are taxed at
Tax benefits
deductible expense for the borrower. 15% or 20% respectively.
Interest may be paid out of any source
Sources of payment Dividends can only be paid out of profits.
(income generated or capital raised).
Debt may be secured by creation of No security creation is possible to secure the
Security
security over the assets of the borrower. investment amount or returns thereon.

Types of Instruments in Indian Context

CCPS CCD
Particulars Equity NCD
(Quasi-–Equity) (Quasi-Debt)

Only lender rights;

Participation in Fixed dividend
Assured coupon and however, veto rights
Basic Character governance and risk and convertible
convertible into equity can ensure certain
based returns into equity
degree of control.

Arm's length interest

pay out – fixed or
Fixed or variable
Dividend must be declared out of profits of variable. Interest can
Returns interest coupon - not
the company. be required to
dependent on profits
accrue only out of
free cash flows.

Available Post Available Post

Voting Rights Available Not Available
Conversion Conversion

Interest expense
Interest expense
No tax deductions available to investee deductible for the
deductible for the
Tax Implication company; dividends are calculated after investee –
investee – allow
for Investee / post-tax income; an additional Dividend Withholding tax can
borrower to reduce
Borrower Distribution Tax of 15% is levied on any range from 10-40%
book profits and the
dividends paid by the investee. depending upon
tax burden.
investee jurisdiction.

Subject to capital
Subject to capital
Tax implication for gains at the time of
Subject to capital gains at the time of exit. gains during
Investor / Lender exit (in case of
redemption.
conversion).

Statutory
NCD ranks the highest in terms of liquidation preference followed by CCD followed by
Liquidation
CCPS. Equity gets the last preference as per the liquidation waterfall.
Preference

1
Source: Asha Impact Analysis
 Landscape of Debt in India

Indian debt market has primarily been short to medium term.

Gaps exist in the availability of medium to long term debt capital.

Medium to long term debt is a nascent yet vibrant market. Key challenge for
SGBs is getting access to working capital at affordable interests rates.

Source: India Impact Fund of Funds Concept Note, 2018 2

 ANDE India SGB Finance Learning Lab
Agenda
Member Interest/
Challenges Solutions Examples
Invitees

High Cost of Hedging for • Lemelson • Harsha Rawal (E&Y)

loans denominated in Masala Bonds Foundation & • Anuj Sharma
foreign currency Biosense (ASCO-Invitee)

• AB Chakravarthy
(Menterra Advisors)
High Perceived Risk for • IFMR Capital • Nehal Sanghavi
First Loss Default
certain impact focused • USAID (USAID)
Guarantee
business models • Grameen Impact • Priya Shah (YSB)
• Royston Braganza
(Grameen Impact)

• Maneesha Chadha
Limited Sources of • Rockefeller Smart
Access to CSR and (JP Morgan)
Patient Capital – muted Power India initiative
Philanthropic Capital • Priya Naik (Samhita)
returns over longer horizon for Mini-Grids
• Gunjan Patel (SAP)

• Educate Girls • Kartik Desai (Asha

Lack of Innovative
Structures – to drive
accountability, crowd-in
private investment, enable
funding for non-profit as well
as for-profit businesses
• Palladium Impact)
Result Based Financing
• British Asia Trust • Shashank Awasthi
Instruments in sectors
• Varthana/ MSDF pay (Grey Ghost / IEOF-
such as education, health-
for success contract Invitee)
care, energy
• India Education • Rahil Rangwala
Outcomes Fund (MSDF-Invitee)

• PR Ganapahty
Lack of Innovative
Royalty/Dividend/Contract (Vilgro)
Contracts – to finance very • TBC
based repayment • Starlene Sharma
early stage start-ups
(Sangam Ventures)

SGB Finance Learning Lab – Next Steps

1. Knowledge Sharing Sessions: Between April and September 2018, we propose to conduct 3 to 4
knowledge sharing sessions on selected focus areas where ANDE Members and Sector Expert will cover
the topic in-depth and share insights and challenges in operationalizing the proposed solutions.

1. Transaction Documents: Based on member interest and traction generated in the sessions, the group
can aim to compile standardized transaction documents for specific solutions and instruments (e.g. the
work that has been done on Masala Bonds till date on the current deliberations on SIBs/DIBs).

2. Advocacy & Industry Engagement: Collaborate with IIC, IVCA and other industry associations on
government advocacy to enable CSR capital to be used for funding for for-profit SGBs.

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Source: Asha Impact Analysis