Page 25 - DMGT409Basic Financial Management

Basic Financial Management

Notes 5. Redeemable Debentures: Normally debentures are issued on the condition that they shall
be redeemed after a certain period. They can however, be reissued after redemption.
6. Perpetual Debentures: When debentures are irredeemable they are called perpetual.
Perpetual Debentures cannot be issued in India at present.

7. Convertible Debentures: If an option is given to convert debentures into equity shares at

the stated rate of exchange after a specified period, they are called convertible debentures.
8. Participating Debentures: They are unsecured corporate debt securities which participate
in the profits of the company. They might find investors if issued by existing dividend

paying companies.
2.2.3 Loans form Financial Institutions

There are many specialised financial institutions established by the Central and State governments

which give long-term loans at reasonable rate of interest.

Example: Industrial Finance Corporation of India (IFCI), Industrial Development Bank of
India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), Unit Trust of India
(UTI), and State Finance Corporations etc.

These financial institutions grant loans for a maximum period of 25 years. These loans are covered

by mortgage of company’s property and/or hypothecation of stocks shares etc.
The major benefits derived from such loans are:

1. The rate of interest payable is lower than the market rate and

2. The amount of loan is large.

2.2.4 Public Deposits

Public deposits or term deposits are in the nature of unsecured deposits, have been solicited

by the firms (both large and small) from general public primarily for the purpose of short and
medium term requirements.

Important Guidelines

Fixed deposits accepted by companies are governed by the Companies (Acceptance of Deposits)
Amendment Rules, 1978. The main features of this regulation are:

1. A firm cannot issue public deposits for more than 25 per cent of its share capital and free
reserves.
2. The public deposits can be issued for a period ranging from a minimum 6 months to
maximum 3 years. Public deposits for a period of three months, however, can as well be
issued, but only for an amount up to 10% of the company’s share capital and free reserves.
Maximum period of 5 years is allowed for Non-banking Financial Corporation (NBFCs).

3. The company that had raised funds by way of issue of public deposits is required to set
aside, a deposit and/or investment, by the 30th April each year an amount equal to 10 per
cent of the maturity deposits by the 31st March of the next year. The amount, so set aside
can be used only for repairing the amount of deposits.
4. Finally, a company’s and accepting the public deposits is required to disclose some true,

fair, vital and relevant facts in regards to its financial position and performance.

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