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Unit 3: Sources of Finance

 Convertible debentures with options: A derivative of the convertible debentures, with an Notes
embedded option, providing flexibility to the issues as well as the investor to exit from
the terms of the issue. The coupon rate is specified at the time of issue.
 Third party convertible debenture: Debt with a warrant allowing the investor to subscribe
to the equity of a third firm at a preferential price vis-à-vis the market price. Interest rate
here is lower than pure debt on account of the conversion option.
 Mortgage backed securities: An instrument, otherwise known as the Asset Backed Security
(ABS), for securitization of debt. An ABS is backed by pooled assets like mortgages, credit
card receivables and the like.

 Convertible debentures redeemable at premium: Convertible debenture issued at face value
with a 'put' option entitling investors to sell the bond later to the issuer at a premium. It
serves a similar purpose as that of convertible debt, but risks to investors are lower.

 Debt equity swaps: An offer from the issue of debt to convert (swap) it for common share.
The risk may dilute earnings per share in the case of the issues, the expect capital appreciation
may not materialize in the case of investor.
 Zero coupon convertible note: A Zero Coupon Convertible Note (ZCCN) converts into
common shares. If investors choose to convert, they forego all accrued and unpaid interest.
The risk ZCCN prices are sensitive to interest rates.

Did u know? What are floating rate bonds?
The bonds in which the interest rate is not fixed and is allowed to float depending upon the
market conditions. This has become very popular as a money market investment.
3.2.6 Loans from Financial Institutions

In India, specialized institutions provide long-term financial assistance to industry. Thus, the
Industrial Finance Corporation of India, the State Financial Corporations, the Life Insurance
Corporation of India, the National Small Industries Corporation Limited, the Industrial Credit
and Investment Corporation, the Industrial Development Bank of India and the Industrial
Reconstruction Corporation of India provide term loans to companies. Before a term loan is
sanctioned, a company has to satisfy the concerned financial institution regarding the technical,
commercial, economic, financial and managerial viability of the project for which the loan is
required. Such loans are available at different rates of interest under different schemes of financial
institutions and are to be repaid according to a stipulated repayment schedule.
Term loans represent secured borrowings and at present it is the most important source of
finance for new projects. They generally carry a rate of interest inclusive of interest tax, depending
on the credit rating of the borrower, the perceived risk of lending and the cost of funds. These
loans are generally repayable over a period of 6 to 10 years in annual, semi-annual or quarterly
installments.
Term loans are also provided by banks. State financial/development institutions and all-India
term lending financial institutions. Banks and State Financial Corporations normally provide
term loans to projects in the small scale sector, while for the medium and large industries, term
loans are provided by state developmental institutions alone or in consortium with banks and
State-Financial Corporations. For large scale projects all-India financial institutions provide the
bulk of term finance either singly or in consortium with other all-India financial institutions,
state level institutions and/or banks.

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