c


m


Õ A company needs Rs 5,00,000 for construction
of a new plant . The following three financial
plans are feasible:
i. The company may issue 50,000 ordinary shares
at Rs 10 per share.
ii. The company may issue 25,000 ordinary shares
at Rs 10 per share and 2500 debentures of Rs
100 denominations bearing 8% interest.
iii. The company may issue 5000 debentures of Rs
100 denominations bearing 8% interest.
The company ƍs EBIT is Rs 1,00,000. what are the
EPS under each of the three financial plans.
Assume a corporate tax rate of 50%.
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Õ A company has assets of Rs 10,00,000 financed
wholly by equity share capital . There are
1,00,000 shares outstanding with a book value
of Rs 10 per share. Last yearƎs profit before tax
was Rs 2,50,000. the tax rate is 35%. The
company is thinking of an expansion plan that
will cost 10,00,000. the financial manager
considers the three financing plans
i. Selling 1,00,000 shares at Rs 10 per share
ii. Borrowing Rs 10,00,000 at an interest rate of
14%
iii. Selling Rs 10,00,000 of preference shares with a
dividend rate of 14%.
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Õ cebt market is many times bigger in most developed
countries than other financial markets

Õ The US bond market is the largest securities market

with a size of $13.5 trillion and a daily turnover
exceeding $500 billion.

Õ Size of world debt market is close to US $ 31.4 trillion

which is nearly equal to total GcP of all countries.

Õ Size of Indian debt market is $100 billion and

accounts for 30% of the GcP.

Õ It is the third largest debt market in Asia followed by

Japan and Korea.
 m
  

Õ Traditionally a wholesale market with
participation restricted to few institutional
players- mainly banks

Õ Market was generally underdeveloped due to

?
  ? 
 and
availability of investment avenues giving higher
rate of return.

Õ Presently a fairly developed debt market has

emerged comprising of:
i. Private corporate debt market
ii. Public sector undertaking bond market
iii. Government securities market
Õ Reserve bank of India regulates the government
securities market and money market while
corporate debt market managed by SEBI.

Õ Money market is a market for short term debt

instrument and debt market is a market for long
term debt instruments

Õ Characteristics for efficient debt market

Competitive market structure
Low transaction cost
Strong and safe market infrastructure
High level of heterogeneity among market participants.
 
   



Õ Major participants in the debt market are

Central and state government
Primary dealers
Public sector undertakings
Corporates
Banks
Mutual funds
Foreign institutional investors
Provident funds
Charitable institutions and trust
 








Õ ôew issues are floated either through prospectus,

rights or private placement

Õ cebt instruments are traded on OTCEI, BSE and

WcM segment of ôSE.

Õ Instruments traded in the market include govt.

securities, T- bills, bonds issued by PSUs, floating
rate bonds, zero coupon bonds, index bonds,
commercial paper, certificates of deposit, corporate
debentures, state government loans, SLR and ôon
SLR bonds issued by financial institutions and local
bodies and securitised debt.

Õ Brokers, trading members and participants are

involved in the ôSE WcM segment
 






Õ Interest rate ceiling on corporate debt has been
removed

Õ Ceiling of bank investment in corporate debt has been

removed.

Õ FII has been permitted to participate in the corporate

debt market

Õ All debt instruments irrespective of their maturities are

required to be rated by credit rating agency.

Õ Provident fund has been allowed to invest in bonds

rated by at least two rating agencies

Õ cepositories have been set up to facilitate

dematerialization and safe settlement of instruments.
 


 
 


Õ These bonds are medium and long term obligations

issued by Public sector undertakings

Õ Majority of PSU bonds are privately placed with

banks or large investors.

Õ They generally issue tax free and taxable bonds

 %
 
 

Õ Government securities are called as %   


Õ It is the largest market in any economy and therefore is a
benchmark for other markets.
Õ Govt. securities are issued by the central government,
state government, and semi- government authorities.
Õ m 
? 
?    

1. Wholesale market segment
2. Middle segment
3. Retail segment
Õ There are two types of securities- ?   ?
 
 ? 

Õ Govt securities are issued either through ?
  ? 
 ?  ?

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Secondary Market in Govt. Securities
Õ It can be categorized into wholesale institutional
segment and retail segment
Õ Securities are traded in SGL form in market lots of Rs
5 crore
Õ It is wholesale in nature with most deals negotiated
over the phone.
Õ Wholesale segment consists of banks, Pc, mutual
fund, insurance, others
Õ Retail segment includes cooperative banks, PF,
ôBFCs and others
Õ Securities are traded in lots of Rs 1 crore
Õ ôSE offers trading on ôEAT
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cebenture/bond is a debt instrument indicating that a
company has borrowed certain sum of money and
promises to repay it in future under clearly defined
terms.

It is also defined as an acknowledgement of debt, given

under the seal of company and containing a contract for
the repayment of the principal sum at a specified date
and for the payment of interest at fixed rate percentage
until the principal sum is repaid, and it may or may not
give the charge on the asset of the company as security
of the loan.
 


 
Õ Trust indenture: it is a complex and lengthy legal document
stating the conditions under which a bond has been issued.

Õ It provides the specific terms of agreement such as

description of debenture, rights of debenture holder, rights of
the issuing company and responsibilities of the trustees.

Õ Trustees is a bank or financial institution that acts as a third

party to the bond to ensure that the issue does not default on
its contractual responsibilities to the bond holders.

Õ Interest: the debenture carries a fixed rate of interest,

payment of which is legally binding

Õ Maturity: It indicates the length of time for redemption

Õ cebenture redemption reserve: It is a requirement in the
debenture indenture to provide for systematic retirement
of debenture on maturity.

Õ Call and put provision: the call/buyback provides an

option to the issuing company to redeem the debenture
at a specified price before maturity. The put option is the
right to the debenture holder to seek redemption at a
specified time at a predetermined price.

Õ Security

Õ Convertibility

Õ Credit rating

Õ Claim on income and assets

 +  

Õ Bearer debenture:
Õ Registered debentures
Õ Perpetual or irredeemable debentures
Õ Redeemable debentures
Õ cebentures issued as collateral security for a
loan.
Õ Secured debentures
Õ Unsecured debentures
Õ Convertible and non convertible debentures
Õ Floating rate debenture
   



Õ Trading on equity i.e. fixed cost capital help in increase
in profit available for equity shareholders.
Õ The debenture holders have no right to participate and
vote in the shareholders meeting.
Õ The company can adjust its debt-equity ratio according
to its financial plan just by redemption of debenture or
raising of finance. This much ease is not available with
equity capital.
Õ Interest payable on debenture is tax deductible making
it a cheaper source of finance.
Õ At the time of winding up debentures are serviced before
share capital
Õ cebentures are generally secured on assets of the
company and therefore carry lesser risk and assured
return on investment.
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Õ It is obligatory on the part of the company to pay
interest at regular intervals and repayment of principal
on scheduled dates.
Õ The debenture trust deed will contain restrictive
covenants which may not be favourable to management
control or equity shareholders.
Õ cebentures usually have fixed maturity date. Because of
the fixed maturity date provision must be made for
repayment of the cost.
Õ There is a limit to which fund can be raised through
debt.
Õ Since long term debt is a commitment for long period, it
involves risk
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m

 
Õ gero Interest Bond
- They do not carry any explicit rate of interest
- They are sold at a discount from their maturity value
- The difference between face value of the bond and the
acquisition cost is the gain.

Õ ceep ciscount bond

- It is issued at a deep/steep discount at its face value
- It appreciates to its face value during the maturity period
Õ IcBI in 1992 had come up with a s
s
 s of    

 at
a s s
    
 with a
   s   
. If the investors
hold it for 25 years the annualized return comes
out to be
 The investor had the option
to withdraw at the end of every five years with a
specified maturity and face value ranging
between Rs 5,700 (after 5 years) and Rs 50,000
after 20 years, the implicit annual rate of
interest being 16.12 and 15.71 respectively
 ã


c
Õ Equity warrant is a piece of paper attached to a non convertible
debenture which gives the buyer or holder right to apply for and
acquire an equity share at a future date.

Õ The benefits to the corporate are

- It increases the marketability of debentures.
- The opportunity of receiving equity shares at a future date is a great
attraction for investors particularly for blue chip companies.
- Provides an effective tool for long term planning of capital
structures to minimize cost of capital.

Benefits to investors
- Assured rate of interest over the life of the debenture
- Equity shares of the company can be acquired.
Õ Secured premium notes
- It is a secured debenture redeemable at premium over
the face value/ purchase price
- There is a lock in period during which no interest is paid
- The redemption is made in installment

Õ Junk Bonds
- They are corporate bonds with low credit rating
- They are traded in dealer market.
- Institutional investors hold largest share of junk bond.
- Firms with low credit rating are ready to pay 3-4% more
for junk bonds to compensate for the greater risk.
- They are widely used as a source in takeover and
leveraged buyout.