INVESTMENT ANALYSIS

&
PORFOLIO MANAGEMENT

A REPORT
ON
SECURED PREMIUM NOTES

SUBMITTED BY:
GROUP 3
SHREY CHITLANGIA (14A1HP055)
SARTHAK GUPTA (14A1HP024)
SHAMBHAVI UPADHYAY A (14A1HP036)
KANIKA MANHAS (14A2HP415)

SECURED PREMIUM NOTES

What is a secured premium note (SPN)?

A secured premium note is a kind of debenture and an effective method to raise money from
the capital market. A secured premium note or SPN comes with a notice period of four to
seven years and it is redeemable at premium after the notice period. It carries with it the
feature of a warrant which entitles the holder to apply for equity shares provided that the SPN
is fully paid. However, there is a stipulated period of time within which when the holder can
apply for equity shares and has to be initiated within the mentioned time.
There is a minimum time frame which is attached to this instrument called the lock-in period
during which no interest/premium is paid if SPNs are redeemed. Thus, a holder of this
instrument has an option to redeem it at par value once the lock-in period is over.
The structure of this instrument can be explained with the example of TISCO, when it issued
SPNs in 1992 to raise money from the capital market. The company issued 11550000 SPNs
which had a face value of 300 each for 4 to 7 years. TISCO did not pay any interest for the
first 3 years but a fixed amount of Rs 75 was paid from the end of 4 th year onwards which
was the repayment of principal and along with it an additional Rs 75 was paid which was the
interest/premium. Warrants were issued to the holders of this instrument where a fully paid up
equity share having a face value of 100 each could be bought. The time frame within which it
could be undertaken was 1.5 years from the date of allotment. Thus, the lock-in period in this
case was 4 years as no interest was paid during that tenure.

The few important characteristics of this instrument are as follows:

Only listed companies can issue secured premium notes

A company issuing this instrument needs to get an approval from the central
government and only then it can proceed.
A SPN which comes with a warrant is detachable which means it may be sold as
a different instrument and hold no connection with what it originally was.
The time limit within which the conversion can be made has to be specified by
the company.
A secured premium note is a combination of debt and equity which makes it a
hybrid security.

 The lock-in period attached to these instruments can be from 4 to 7 years i.e. the
time during which the holder cannot redeem.
The return derived from this instrument is classified under capital gain.
The holder is always repaid in equal instalments along with interest/premium
after the lock-in period.

Benefits of a secured premium note:

To investors
The investor receives
high rate of return. The
interest/premium
amount is usually high.

It gives the investor an

option to convert his SPN
into equity shares, thereby
becoming a shareholder.

The investor faces less tax

burden as it comes under
capital
gain
and
not
regular income.

To issuer
The issuer does not face
any cash crunch as there in
no fixed interest payment
during lock in period.

Repayment is made in
instalments which again do
not pile up pressure on the
cash outflow of the
company

An effective way to raise

capital for projects by
requiring huge
investments.

Risks associated with SPNs:

Although the repayment is made in instalments but the amount repaid as

interest/premium is very high and thus, as a result, the overall cash outflow of the
company is also high.
There are possibilities where the investor may fail to pay the lump sum amount.
If the SPNs are not fully paid the holder of the instrument faces the risk of converting
SPNs into shares.