COMMERCIAL PAPER
The Commercial Paper is a debt
instrument used for raising short-term funds, and it is being issued by large
Indian companies subject to the detailed guidelines of RBI, the Non-Banking
Companies (accept of Deposits through the Commercial Paper) directives, 1981 of
RBI, defines the eligibility of companies to enter into commercial paper
market, however, these have been relaxed later.
PSU Bonds: - The public sector undertakings issue the PSU Bonds, a
special debt instrument in character, with tax incentives to the public and
financial institutions. However, large portions of these issues are privately
placed either with banks or other financial institutions.
Certificate of Deposits: - Anther special debt instrument, a short-term debt,
issued by banks is Certificate of Deposits. These are issued within the ceiling
specially prescribed for them. The maturity period for these instruments range
from 3 months to one year with varying interest rates.
Deep discount bonds: - is a bond with higher face value, but issued at a
deep discount and redeemed at the maturity of specified number of years at face
value. The bonds may also be sold, if necessary, at short period for a deemed
face value. The difference between the sale price and original cost of
acquisition of these bonds is treated as capital gain. The ICICI, IDBI and
SIDBI have issued bonds of this type.
The equity shares or common
stock are also called as ‘ownership securities’. Investment in equity shares
entitle their owners not only to get the right of sharing divisible profit in a
company but also to exercise control over management fundamentally. Now-a-days
different varity of ownership securities are being traded.
Indirect equity refers to the
special instruments of institutional investors who make investments on behalf
of their small investors. The institutional investors represent the investing
public who can’t exercise the professional expertise in the investment decision
what the former can do. The special instruments here refer to units of the
Trusts/Mutual Funds, from which the investor gets dividend after meeting all
expenses of the Assent management. The institutions refer to units of UTI and
the like. The units can be bought and sold only at this institution,
characteristically, at a price determined by the valuation of assets from time
to time. However, there is where the sale and purchase and the price of
units/instruments can be affected through secondary markets where they traded.
Preference shares:
It is a hybrid instrument as it has the characteristics of both
debt and equity. It has the preference over dividend from taxed income after
interest, and the redemption of capital after specified period or at the time
of liquidation. These are less risky to hold, compared to equities, but more
risky to debentures. The redeemable preference shares, cumulative preference
shares participating preference shares, etc. are different types of preference
shares based upon its terms and characteristics. For the preference
shareholders, the fixed rate of dividend, preference to capital and dividend at
the time of liquidation, accumulation of dividend at the time of insufficient
profit or loss making position, etc. are the advantages of preference shares;
however, very lesser fixed rate of dividend compared to equity shares and
having no right of control over management, etc. are its drawbacks.
A Company issuing preference
share may benefit from paying the fixed rate of dividend liability and avoiding
the problem of dilution of control, whereas the higher cost of raising capital,
accumulation of dividend to the future and non-availability of tax-shield
towards profit are some of the limiting factors to consider.
There are varieties of
innovative financial instruments with different characteristics that may serve
the needs of both investors and the companies that use these instruments for
raising funds.
Non-Voting Shares:
These are the shares similar to
equity, but having no voting rights. These will be useful instruments for
companies that prefer to raise additional funds without diluting the control of
the existing shareholders.
Detachable Equity Warrants:
These warrants will be issued with
non-convertible debentures (NCDs) or other debt or equity instruments. The
firms with growth prospectus would prefer these equity coupons to convertible
debentures.
Participating preference
Shares:
This is a quasi-equity instruments that a company may prefer to issue for supporting its networth without losing its control over management is less risky. The payouts linked to equity dividend and eligibility for bonus is other characteristics of this type of shares.
Participating
debentures:
The unsecured corporate debt securities that entitle its holders to share profits of a company are called as ‘ participating debentures’. The existing- cum- dividend- paying companies may prefer this issue as it will attract the investors looking for higher returns with risk- taking.
Convertible
debentures with options:
This is a derivative, which provides flexibility to the issues as well as investors to exit from the terms of its issue. This coupon rate of these securities will be specified at the times of issue itself.
Third party
convertible debentures:
This is a type of debt with a warrant that allows the investor, the subscription to equity of a third firm at a preferential price vis- a- vis the market price. It has lower interest rate than a pure debt as it has the option of conversion.
Mortgage- Backed
securities or Asset- Backed Securities:
These refer to the synthetic instruments, which all backed by grouped or pooled assets like mortgages, credit card receivables, etc., for securitising the debt.
Convertible
Debentures Redeemable at Premium:
The convertible debentures are issued at a face value with a ‘put’ option that entitles the investors to sell the debentures later to the issues at a premium. It is less risky debt than the convertible debts.
Debt Equity Swaps:
This is an offer made by its issuers to swap/ exchange it for common stock, However, the Issuer has the risk of dilution of earnings per share whereas the investor has the risk of lack of expected capital appreciation in this issue.
Zero- Coupon
Convertible Notes:
A zero- coupon convertible note has the characteristic of conversion into common stock. If an investor chooses the conversion, he has to forgo all accrued and unpaid interest, if any. However, this note has the risk of price sensitivity towards the interest rates.