secured premium notes or special premium notes

Special Premium Notes Or Secured Premium Notes



Introduction

The capital market is the market for securities, where companies and governments can raise long-term funds. Selling stock and selling bonds are two ways to generate capital and long term funds. The capital markets consist of the primary market, where new issues are distributed to investors, and the secondary market, where existing securities are traded.
It deals not capital goods but concerned with rising of money capital for investment. The Indian Equity Markets and the Indian Debt markets together form the Indian Capital markets. Capital markets help channelise surplus funds from savers to institutions which then invest them into productive use. Capital market is the key driver of wealth creation and growth in many countries. The regulators financial institutions and most importantly the investors keep trade of the development in the global capital markets. SPN is regarded as an innovative financial instrument under the concept of capital market.
THE ROLE OF THE INDIAN CAPITAL MARKET
To meet its long term and short term needs of finance, a company may issue various kinds of securities to raise funds from public. When an investor buys securities commonly referred to as shares he is enabling the company to carry on its business using the funds provided with little stress.
RECENT TRENDS IN CAPITAL MARKET INSTRUMENTS –
Many instruments namely, secured premium notes, non convertible debentures, zero interest equity shares and fully convertible cumulative redeemable preference shares were introduced to suit the needs of investors and issuers/borrowers. The resources mobilized by these innovative financial instruments accounted for 38 percent of the total resource mobilization by non-government public limited companies. Business enterprises need funds to meet their different type of requirements.
Capital market instruments as long term source of finance. Capital market instruments are responsible for generating funds for companies, corporations and sometimes national governments. These are used by the investors to make a profit out of their respective markets.
Classification of Instruments can be classified into three categories: 1. pure, 2. Hybrid, and 3. Derivatives.
Pure instruments: Pure instruments can be classified into Equity Shares, preference shares and debentures/ bonds which were issued with their basic characteristics in tact without mixing features of other classes of instruments are called Pure instruments.
Hybrid Instruments- Hybrid instruments are those which are created by combining the features of equity with bond, preference and equity etc. Examples of hybrid instruments are : Convertible Preference shares, Cumulative convertible preference shares, non convertible debentures with equity warrants, partly convertible debentures, warrants convertible into debentures or shares, secured premium notes with warrants etc.
Derivatives- Derivatives are contracts which derive their value from the value of one or more of others assets. Some of the most commonly traded derivatives are futures, forward, options and swaps.
debt instruments or Financial instruments to raise the funds-
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. A financial asset is any asset that is: (a) cash; (b) an equity instrument of another entity; (c) a contractual right: (i) to receive cash or another financial asset from another entity; or (ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity.
Financial instruments are tradable assets of any kind. It is a financial asset that can be bought or sold, such as a bond, share, or other security. They can be cash, evidence of an ownership interest in an entity, or a contractual right to receive or deliver cash or another financial instrument.
Debt Instruments are obligations of issuer of such instrument as regards certain future cash flow representing Interest & Principal, which the issuer would pay to the legal owner of the Instrument. They can also be said to be tradable form of loans.
DIFFERENT SOURCES FROM WHERE FINANCE CAN BE RAISED IN INDIA.
LOAN- A fixed amount borrowed from financial institutions repayable over a fixed period as per the terms at fixed rate of interest is called as loan.
DEBENTURES and BONDS -Debenture is a debt instrument, which is issued to small investors and financial institutions to raise funds for a fixed term at fixed rate of interest Section 2 (12) of companies Act defines debentures as follows: "Debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not".
WARRANTS- Warrant is a popular means of raising finance in the developed countries.
Features of warrant-Warrants give its holder the right, but not the obligation to subscribe to a certain number of equity shares at a stated price during a specified period. Warrants are generally issued to sweeten debt issues. To attract investors, a warrant was attached to each special premium notes.
A share warrant is an option to the investor to buy a specified number of equity shares at a specified price over a specified period of time. The warrant holder has to surrender the warrant and pay some cash known as the exercise price of the warrant to purchase the shares. On exercise of the option, the warrant holder becomes a shareholder.
NEW TYPES OF DEBENTURES OR FINANCIAL INSTRUMENTS-
New types of Debentures mentioned by SEBI are deep discount bonds, debentures with warrants and secured premium notes. While making an issue of any new financial instrument, the issuer of capital shall make adequate disclosures regarding the terms and conditions, redemptions, security, conversion and any other relevant features of the instruments. Premium note is a promissory note given in payment of the premium due on a policy of insurance. Premium notes are required as capital of the company. They are payable when called for, according to the charter and by-laws of the company, to pay losses and expenses.
SECURED PREMIUM NOTES
One such financial instrument through which a company can raise capital is secured premium note. Secured premium notes are of the Nature of debentures.
SPN is a new instrument, which is issued by a company to its shareholders. Secured premium notes (SPNs) are financial instruments which are issued with detachable warrants and are redeemable after certain period. SPN is a kind of non-convertible debenture (NCD) attached with warrant. It can be issued by the companies with the lock-in-period of say four to seven years. This means an investor can redeem his SPN after lock-in-period. SPN holders will get principal amount with interest on installment basis after lock in period of said period. However, during the lock in period no interest is paid.
ORIGIN OF CONCEPT OF SECURED PREMIUM NOTES-

Security Premium Notes - SPN Tata Iron & Steel Company (Tisco – now changed its name to TATA STEEL LTD) in 1992 and Reliance took the first step to issue this kind of Security. TISCO issued SPN for the first time in India in the year 1992 to rise 1212 crore. SPN are issued as debt securities with detachable warrants. These securities are redeemable after a period of 5-7years.
The holder has an option to sell back the SPN to Company at par value after the lock-in. If the holder keeps it further, he is repaid with the principal and accrued interest at the time of redemption. Simultaneously the detachable warrants are converted into Equity Shares as per notification & time limit by the Company.
SPN is an instrument that is secured by mortgage of immovable property of the company. The warrants attached to it ensure the holder the right to apply and get allotted equity shares; provided the SPN is fully paid.
The salient features of the SPN are as follows-
The SPN is issued at a nominal value and does not carry any interest.
The SPN is redeemed by repayment in several installments at a premium over the face value. The premium amount is distributed equally over the period of maturity of the installment.
The SPN may carry a detachable warrant, which will give the holder a right to claim allotment of share(s) for cash at a certain price.
The holder can exercise this right after a certain period from the date of allotment of SPN.
The instrument is seemed by a mortgage of all the immovable properties of the company.
SPN is a hybrid security i.e. it combines both features of equity and debt products.

Legal Provisions For Utilization Of Security Premium?
Section 78 - Companies Act, 1956 securities premium could not be used otherwise than for the specific purpose mentioned in section 78(2) of the Act. Which are- in paying up its unissued securities, to be issued to its members as fully paid bonus shares; - in writing off its preliminary expenses; - in writing off the expenses of or the commission paid or discount allowed on any issue of securities or debentures of the company or - in providing for the premium payable on the redemption of any redeemable preference securities or any debentures of the company. - Purchase of its own shares or other specified securities [Section 77A(1)(iii)].
ADVANTAGES OF SPN FOR THE COMPANY–
The Company has lesser risk exposure of redeeming these securities during the lock-in. Hence Company can focus on its utilisation part than on repayment threat. For holders– The term of SPN provides that ROI was treated as Long Term Capital Gain (As the lock-in is exercised). Consequently, the rate tax applicable is lower.
 The detachable warrants are convertible into equity shares provided the secured premium notes are fully paid. The conversion of detachable warrants into equity has to be done within the specified time.
After the lock-in-period, the holder has an option to sell back the SPN to the company at par value. If the holder exercises this option, no interest/premium is paid on redemption.
In case the holder keeps his investment further, he is repaid the principal amount along with the additional interest/premium on redemption in installments. SPN were so formulated that the return on investment was treated as capital gain and not regular income. Consequently, the rate of tax applicable was lower.

RIGHTS TO SPN HOLDER-
The warrants attached to SPN gives the holder the right to apply and get allotted equity shares; provided the SPN is fully paid.
Detachable warrant is a derivative that is attached to a security and gives the holder the right to purchase an underlying security at a specific price within a certain time frame. A detachable warrant is often combined with various forms of debt offerings and can be removed by the holder and sold in the secondary market separately.
The SPN holder has an option to sell back the SPN to the company at par value after the lock in period. If the holder exercises this option, no interest/ premium will be paid on redemption. In case the SPN holder holds it further, the holder will be repaid the principal amount along with the additional amount of interest/ premium on redemption in installments as decided by the company. The conversion of detachable warrants into equity shares will have to be done within the time limit notified by the company.
If a borrower defaults on a secured note, the assets it has pledged as collateral can be sold to repay the note. This feature decreases the risk associated with secured notes, so lenders earn a lower interest rate than they would earn with riskier issues such as unsecured notes. With an unsecured note, the borrower does not pledge any assets as collateral, so it must pay the lender a higher interest rate in order to compensate them for the increased risk.

CONCLUSION-
To meet the long term and short term needs of finance, firms issue various kinds of Securities to the public. But while issuing any security there is always high risk of pay back involves. SPN is a new tradable debenture instrument befitting both the companies and holders by lessening the threat of payback until the completion of certain time period.
SPN can also be regarded as a stock benefit which the capital issuer gets. The terms of the SPN were so formulated that the return on investment was treated as capital gain and not regular income. Consequently, the rate of tax applicable was lower.



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