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Sources of Long TermFinance

Abhilashita Rao

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Sources of funds in domesticmarket

1. Equity2. Pref. Capital

CumulativeNon Cumulative

Convertible

1. DebenturesConvertibleNon ConvertiblePartly Convertible

1. Term Loans2. Equipment Leasing3. Internal Accruals

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Sources of Funds in global markets

1. Depository Receipts

2. External Commercial Borrowings

3. Foreign Currency Convertible Bonds

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Features of Equity Equity is perpetual

The rate of dividend is not fixed

Equity shareholders are owners of the company andhave voting rights

The various types of equity issues are:

Public issueRights issuePrivate placementBonus issue (does not lead to inflow of cash for issuer)

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Debentures Debentures are classified as debt in the issuers

balance sheet.

For debentures with a tenor of greater than 18months , credit rating is mandatory.

The rate of interest is fixed

Debenture holders do not have voting rights

In case of convertible debentures, the principal is notredeemed on maturity, but is converted into equityshares.

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Preference capital

Preference capital generally has afixed tenor, however it may also beperpetual.

The rate of dividend is fixed

The claims of preference shareholderson the issuer are greater than theclaims of ordinary shareholders.

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Global Capital Markets ADR/GDR

Benefits to the Issuer :

Greater Visibility

Diversified Investor Base

Access to capital without bearing currency risk

ADR/GDR proceeds can be used for cross border acquisitions and investments insubsidiaries/JVs overseas.

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DR Issue Process

1. Issuer Company issues underlyingequity which is held by the CustodianBank

2. Depository Bank issues foreigncurrency denominated DR s to

investors as per pre determinedratio.

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Two way fungibility

ADR/GDR can be converted intounderlying shares and sold in Indianmarket.

Based on instructions recd. fromoverseas investors, a broker in India

can purchase shares of an Indiancompany for conversion into DR s.

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FCCB Borrowing in global market

1. FCCB s are quasi debt instruments, and can be converted into equity at a predetermined strike rate, if the investor chooses to do so

2. Like DR s, FCCB s are classified as FDI and hence are subject to sectoral caps.

3. Some FCCB s have a call provision, which enables the issuer to go in for earlyredemption.

4. FCCB s can be secured or unsecured. Redemption is possible at par, premiumor discount.

5. In case ofZero Coupon Bonds, the holder is primarily interested in gains due toconversion.

6. Credit rating is not mandatory.

7. The coupon on FCCB s is generally 30 40 % lower than that in case of comparable ECB s

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Restrictions on utilization of ECBproceeds

Permitted Heads:1. Import of capital goods

2. For lending to self help groups in case of Micro

Finance Institutions3. Investment in JV or WOS abroad

Prohibited Heads:1. Investment in working capital2. Repayment of rupee loans

3. Investment in capital market or real estate (except fordevelopment of integrated townships)

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RBI caps on cost of borrowing

In case of bonds with maturity of 5years or less, the cost should notexceed 300 bps above 6 month LIBOR.

For bonds with longer maturity, costshould not exceed 500 bps above

LIBOR.

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ECB Volumes in 2009

Quarter Amt in million USD

Jan Mar 2943.5

Apr - Jun 2712.0

Jul - Sep 4614.2

Oct - Nov 4939.4