KINDS OF DEBENTURES
Innovative debt instruments that are issued by the public limited companies are described below : 1. Participating debentures 2. Convertible debentures. 3. Debt-equity swaps 4. Zero-coupon convertible notes 5. Secured Premium Notes (SPN) with detachable warrants 6. Non-Convertible Debentures (NCDs) with detachable equity warrant 7. Zero-interest Fully Convertible Debentures (FCDs) 8. Secured zero-interest Partly Convertible Debentures (PCDs) with detachable and separately tradable warrants 9. Fully Convertible Debentures (FCDs) with interest (optional) 10. Floating Rate Bonds (FRB)
1. Participating debentures: Debentures that are issued by a body corporate which entitle the holders to participate in its profits are cal corporate debt securities. They are popular among existing dividend paying Corporates.
2. Convertible debentures
a. Convertible debentures with options are a derivative of convertible debentures that give an option to both the issuer, as well as the investor, to exit from the terms of the issue. The coupon rate is specified at the time of issue.
b. Third party convertible debentures are debts with a warrant that allow the investor to subscribe to the equity of a third firm at a preferential price vis-à-vis market price, the interest rate on the third party convertible debentures being lower than pure debt on account of the conversion option.
c. Convertible debentures redeemable at a premium:
Premium are issued at face value with a put option entitling investors to sell the bond to the issuer, at a premium later on. They are basically similar to convertible debentures but have less risk.
3. Debt-equity swaps:
They are offered from an issue of debt to swap it for equity. The instrument is quite risky for the investor because the anticipated capital appreciation may not materialize.
4. Zero-coupon convertible note:
These are debentures that can be converted into shares and on its conversion the investor forgoes all accrued and unpaid interest. The zero-coupon convertible notes are quite sensitive to changes in the interest rates.
5. SPN with detachable warrants:
These are the Secured Premium Notes (SPN) with detachable warrants. These are the redeemable debentures that are issued along with a detachable warrant. The warrant entitles the holder to apply and get equity shares allotted, provided the SPN is fully paid. The warrants attached to it assure the holder such a right. No interest will be paid during the lock-in period for SPN. The SPN holder has an option to sell back the SPN to the company at par value after the lock-in period. If this option is exercised by the holder, no interest/premium will be paid on redemption. The holder will be repaid the principal and the additional interest/ premium amount in installments as may be decided by the company. The conversion of detachable warrant into equity shares will have to be done within the time limit notified by the company.
6. NCDs with detachable equity warrants:
These are Non-Convertible Debentures (NCDs) with detachable equity warrants. These entitle the holder to buy a specific number of shares from the company at a predetermined price within a definite time frame. The warrants attached to NCDEs are issued subject to full payment of the NCDs value. The option can be exercised after the specific lock-in period. The company is at liberty to dispose of the unapplied portion of shares if the option to apply for equalities is not exercised.
7. Zero interest FCDs:
These are Zero-interest Fully Convertible Debentures on which no interest will be paid by the issuer during the lock-in period. However, there is a notified period after which fully paid FCDs will be automatically and compulsorily converted into shares. In the event of a company going in for rights issue prior to the allotment of equity (resulting from the conversion of equity shares into FCDs), it shall do so only after the FCD holders are offered securities.
8. Secured Zero interest PCDs with detachable and separately tradable warrants:
These are Secured Zero Interest Partly Convertible Debentures with detachable and separately tradable warrants. They are issued in two parts. Part A is a convertible portion that allows equity shares to be exchanged for debentures at a fixed amount on the date of allotment. Part B is a non-convertible portion to be redeemed at par at the end of a specific period from the date of allotment. Part B which carries a detachable and separately tradable warrant provides the warrant holder an option to received equity shares for every warrant held, at a price worked out by the company.
9. Fully Convertible Debentures (FCDs) with interest (optional):
These are the debentures that will not yield any interest for an initial short period after which the holder is given an option to apply for equities at a premium. No additional amount needs to be paid for this. The option has to be indicated in the application form itself. Interest on FCDs is payable at a determined rate from the date of first conversion to the date of second/final conversion and in lieu of it, equity shares will be issued.
10. Floating Rate Bonds (FRB‟s):
These are the bonds where the yield is linked to a benchmark interest rate like the prime rate in USA or LIBOR in the Euro currency market. For instance, the State Bank of India’s floating rate bond, issue was linked to the maximum interest on term deposits that was 10 percent at the time. The floating rate is quoted in terms of a margin above of below the benchmark rate. Interest rates linked to the benchmark ensure that neither the borrower nor the lender suffer from the changes in interest rates. Where interest rates are fixed, they are likely to be inequitable to the borrower when interest rates fall and inequitable to the lender when interest rates rise subsequently.
The preferential issue of equity shares/Fully Convertible Debentures (FCDs/Partly Convertible Debentures (PCDs) or any other financial instruments which would be converted into or exchanged with equity shares at a later date, by listed companies whose equity share capital is listed on any stock exchange, to any selected group of persons under the Companies Act, 1956 on private placement basis shall be governed by these guidelines.