2.8 Company's Funding Routes


The company may wish to meet its entire funding requirement by share capital or it may meet part of it by equity share and the rest by borrowing. The money raised by borrowing is called ‘debt’. So, if companies have to mobilise long-term capital, they would have two options:

• Raise through shares (equity capital).
• Borrow (Debt Capital)

Debt Capital

This method of financing is similar to a personal loan that we may take, as for example, to buy a car. The difference is that companies need much larger sums of money. They may approach the public and or banks that specialize in meeting such funding needs of companies. The companies have an obligation to pay interest for the amount borrowed by them. These are fixed rates of return and such deposits are called Company Fixed Deposits (CFD).

There are some debt instruments which are different. They are called debentures. As you know a debenture is a debt instrument that is backed by the security of fixed assets. Debentures carry a coupon rate (fixed interest rate). A convertible debenture also has a coupon rate and at the expiry of a given time from the date of allotment, the debenture is converted into an equity share at a predetermined price.

There are basically three types of debentures:

• Fully Convertible Debentures (FCDs): The entire value of the debenture is converted into shares in a predetermined ratio.
• Non-Convertible Debentures (NCDs): Remain as a debenture for their entire life.
• Partly Convertible Debentures (PCDs): A part of the debenture is converted into shares and the rest remains as a non-convertible portion, which is redeemed at a predetermined price.

Companies also can offer warrants as a part of their new offering. A warrant is an instrument that can be converted into equity shares at the choice of the investor at certain predetermined prices and quantity at a specified time in the future.

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