CHANAKYA NATIONAL LAW

UNIVERSITY

SECURED PREMIUM NOTES

INVESTMENT & SECURITIES LAW

Submitted to:
Dr. Ajay Kumar

Submitted by:
Anubhuti Varma
Roll No- 721
5th year, 9th Semester

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Research Methodology
Aims and Objectives:
The aim of the project is to present a detailed study of Secured Premium Note.
Scope and Limitations:
The project is basically based on the doctrinal method of research as no field work is done on
this particular topic. The whole project is made with the use of the secondary sources.
Method of Writing:
The method of writing followed in the course of this research paper is primarily analytical and
descriptive.
Mode of Citation:
The researcher has followed Bluebook throughout the course of this research paper.
Sources of Data:
The following secondary sources of data have been used in the project1. Books
2. Websites
3. Statute

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Acknowledgement

It gives me incredible pleasure to present a research work on the case study of Secured
Premium Note. I would like to enlighten my readers regarding this topic and I have tried my
best to pave the way for bringing more luminosity to this topic.
I am grateful to my faculty in charge Dr. Ajay Kumar who has encouraged me to complete this
project. I would like to thank the librarian of CNLU for their interest in providing me ample
research material.
-Anubhuti Varma

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CONTENTS
1. Introduction

2. Functions Performed By Financial Managers/ Scope of Financial Management

3. Types Of Finances
4. Secured Premium Notes

5. Conclusion
6.

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INTRODUCTION
Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise in order to improve the
return on investments and maximize the wealth of a firm. It involves reducing costs and planning
of resources for its optimal use to generate high profits and withstand the threats arising on
account of competition.
Objectives of Financial Management: Financial management refers to the efficient and
effective management of money (funds) in such a manner as to accomplish the objectives of the
organization. The main objective of any organization is to increase the profitability of the
business. However the scope of activity in financial management extends beyond profitability
and it includes:1
Primary Objectives:
Profit Maximization: The main purpose of any kind of economic activity is earning profit.
A business concern operates mainly for the purpose of making profit. Profit has become the
yardstick to measure the business efficiency of a concern. The organizations maximize their
profits by
1. Increasing Revenue/ Turnover
2. Controlling costs
3. Managing Risks
Wealth Maximization: Wealth maximization is also known as value maximization or net
present worth maximization. This objective is a universally accepted concept in the field of
business. Wealth maximization is the concept of increasing the value of a business in order
to increase the value of the shares held by stockholders. The most direct evidence of wealth
maximization is changes in the price of a company's shares.2

http://www.investopedia.com/terms/a/asset_management_company.asp.

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Secondary Objectives:
Judicious planning of Funds: A finance manager has to estimate the financial needs with
regards to capital requirements of the company. This will depend upon expected costs and
profits and future programs and policies of a concern. Estimations have to be made in an
adequate manner which increases earning capacity of enterprise. Excess capital can result in
idle resources and a shortage may interrupt the flow of operations.3
Liquidity: Liquidity is the ability of a company to meet its liabilities as and when they arise.
We often come across profitable companies that may not be liquid. The liquidity aspect of a
company also improves the credit worthiness of a company in the market. A company should
maintain its liquidity position in order to safeguard its position in the market.
Credit worthiness: A company deals with various players in the market in the course of
business. Cash as well as credit transactions are transacted. Credibility engenders belief in
your company. The temptation to stretch your promises is overwhelming when you are
trying to raise capital or secure a partner, especially in today's economy. Credibility is more
important in the long run companies that maintain the best credibility survive while others
fail.
Cost Reduction and Cost Control: Cost control and reduction refers to the efforts business
managers make to monitor, evaluate, and trim expenditures. While cost control deals with
not allowing the cost to rise beyond the planned levels, cost reduction involves a real and
permanent reduction in unit cost of production rendered without impairing their suitability
for the use intended.
Eliminating Competition: There exists cut throat competition in the market. Corporations
are exposed to forces of threat of survival from competitors. One of the objectives of
financial management is to plan activities that will give you an edge over your competitors.
Improving Financial Efficiency: Profitability is not the sole indicator of the financial well
being of an enterprise. It is important the business houses are consistent and stable. Policies
and Strategies are implemented for growth and development activities.
Uninterrupted flow of operations: Working Capital management is an important
3

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management function as it ensures the smooth flow of operations in an enterprise.

Estimating Working capital needs of the organization and a steady flow of resources will
ensure an uninterrupted flow of activities of the business.
Avoiding Idle resources: An organization may sometimes possess excess resources.
Although it is not a cost in itself, however it results in idle resources. Keeping resources idle
means that the resources are not being used to its optimum levels and creates costs to the
company.4
Financial Discipline: Every day we hear of financial scams, fraudulent acts and misuse of
funds for personal gain. Financial discipline includes incorporating financial controls to
monitor and keep a check on the unproductive use of funds. Corporate social responsibility
is gaining importance and businesses are expected to keep up its ethics and value systems
high.
Growth and Development: Growth and development is a continuous process. Every
business unit is expected to carry on its activities for an unexpected period of time in future.
Therefore it invests its funds in the most profitable avenues and plans for expansion, growth
and development activities while trying to keep pace with the changing environment of the
market and consumer behavior.
Capital Budgeting: Capital budgeting is a required managerial tool. One duty of a financial
manager is to choose investments with satisfactory cash flows and rates of return.
Therefore, a financial manager must be able to decide whether an investment is worth
undertaking and be able to choose intelligently between two or more alternatives. To do
this, a sound procedure to evaluate, compare, and select projects is needed. This procedure
is called capital budgeting.
Managing Risks and Uncertainties: A business operates in an environment of risks and
uncertainties. The task of a finance manager is to identify the risks and hedge those risks.
Predicting risks and uncertainties and being prepared for the contingencies reflects sound
business policies.

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FUNCTIONS PERFORMED BY FINANCIAL MANAGERS/ SCOPE OF

FINANCIAL MANAGEMENT
1

Estimation of capital requirements: The primary function of a financial manager is to

estimate the fund requirements. The estimation should be accurate bcos excess of funds
can lead to idle resources and a shortage will affect the liquidity creditability and disrupt
the smooth operations of the business. The estimation of funds for each business will
depend upon the size , nature and risks associated with the business.

Determination of the capital structure: Once the estimation has been made, the capital
structure has to be decided. This involves short- term and long- term debt equity analysis.
The proportion of Debt and Equity in the share capital needs to be decided upon. The
capital structure is important is as the cost of capital can be managed by determining the
capital structure.5

Choice of sources of funds: For funds to be procured, a company has many choices like1. Issue of shares and debentures
2. Loans to be taken from banks and financial institutions
3. Public deposits to be drawn like in form of bonds.

4. Investment of funds: The finance manager has to decide to allocate funds into profitable
ventures so that there is safety on investment and regular returns is
possible. The choice
of a viable business and most profitable investment proposal should be made in order to reap the
highest return on Investments.
5. Disposal of surplus: The net profits decision has to be made by the finance manager. This
can be done in two ways:
1. Dividend declaration - It includes identifying the rate of dividends to be paid to
the shareholders.
2. Retained profits - A portion of the profits that is retained in the business in order
for expansion, innovation, growth and development.

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3. Reserves: A portion of the surplus is kept aside as reserves to serve as a cushion in

times of emergencies.
6. Management of cash: Finance manager has to make decisions with regards to cash
management. Cash is required for many purposes like payment of wages and salaries,
payment of electricity and water bills, payment to creditors, meeting current liabilities,
maintenance of enough stock, purchase of raw materials, etc. It affects the liquidity position
of the company therefore cash management is important to maintain the creditability and
liquidity position.6
7. Financial controls: The finance manager has not only to plan, procure and utilize the
funds but he also has to exercise control over finances. This can be done through many
techniques like ratio analysis, financial forecasting, cost and profit control, etc. Cost control
and minimizing wastages are important functions performed by the financial manager.
8. Financial Analysis and Interpretation: The analysis and interpretation of the financial
performance of the business is done using several ratios to determine the liquidity, profitability
and assets position of the business. The analysis of financial statements is important as it helps
in taking important financial decisions and results in effective planning.
9. Capital Budgeting: Capital budgeting is the process of making investment decisions in
capital expenditure. The expenditure provides
benefits over a period of time
exceeding one year. Expenditure incurred for acquiring fixed assets is an example of capital
expenditure. The
planning of capital expenditure is crucial as it involves huge
amount of funds and extends to longer periods of time.
10. Working Capital Management: Working capital refers to the capital required for day to
day operations of the business. It is essential to
have ideal working capital else it disrupts
the smooth flow of operations in the business. Just as circulation of blood is essential to all parts
of the body for life similarly working capital is required in the business for its survival and
running of a business.
11. Dividend Policy: Dividend is the reward of the shareholders for investments made by
them in the shares of the company. The investors of capital are interested in earning maximum
return on their investments. The companies should decide what portion of the profits has to be
distributed as dividends and what portion has to be retained in the business for expansion, growth
and development activities.
12. Risk Management: Risk is inherent in any type of business activities. The risks may
arise due to falling demand, competition or operational hiccups. The financial manager should be
able to identify the risks associated with a business and should be able to set
alternative
plans in times of unexpected events.
6

https://www.imf.org/external/pubs/ft/pdp/2004/pdp03.pdf.

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13. Maintaining Liquidity: The liquidity position of a company suggests that a company is
able to meet its obligations as and when it arises. The companies do not focus only on
profitability but also make policies for maintaining its liquidity position in the market.
14. Credit Worthiness: Credit worthiness is an important trait of financially efficient
companies who maintain good rapport with its clients
and its customers. The organizations
should build its creditability in the market as it improves the goodwill of the company

TYPES OF FINANCES
Classification according to period is as follows:

Short term finance.

Medium term finance.

Long term finance.7

Long term sources of funds

Medium Term sources of Short Term sources

funds

SHARES

DEBENTURES

DEBENTURES

PREFERENCE SHARES

CUSTOMER ADVANCES

BONDS

BANL LOANS

TRADE CREDIT

LONG TERM LOANS

PUBLIC DEPOSITS

FACTORING

PLOUGHING
PROFITS

BACK

OF BANK DEPOSITS

BANK CREDIT

ACCRUALS

MEDIUM TERM LOANS

DEFERRED INCOMES

LEASE FINANCING

COMMERCIAL PAPER

HIRE
PURCHASE INSTALMENT CREDIT
FINANCING

DEBENTURES:8
7 http://www.investopedia.com/terms/a/asset_management_company.asp.
8

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In corporate finance, a debenture is a medium- to long-term debt instrument used by large

companies to borrow money, at a fixed rate of interest. The legal term "debenture" originally
referred to a document that either creates a debt or acknowledges it, but in some countries the
term is now used interchangeably with bond, loan stock or note. A debenture is thus like a
certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified
amount with interest and although the money raised by the debentures becomes a part of the
company's capital structure, it does not become share capital. Debentures are classified into
various types. These are redeemable, irredeemable, perpetual, convertible, non convertible,
fully, partly, secured, mortgage, unsecured, naked, first mortgaged, second mortgaged, bearer,
fixed, floating rate, coupon rate, zero coupon, secured premium notes, callable etc. Debentures
are classified into different types based on their tenure, redemption, mode of redemption,
convertibility, security, transferability, type of interest rate, coupon rate, etc. Following are the
various types of debentures vis-a-vis their basis of classification.
Redeemable and Irredeemable (Perpetual) Debentures: Redeemable debentures carry a
specific date of redemption on the certificate. The company is legally bound to repay the
principal amount to the debenture holders on that date. On the other hand, irredeemable
debentures, also known as perpetual debentures, do not carry any date of redemption. This means
that there is no specific time of redemption of these debentures. They are redeemed either on the
liquidation of the company or when the company chooses to pay them off to reduce their liability
by issues a due notice to the debenture holders beforehand.9

Convertible and Non Convertible Debentures: Convertible debenture holders have an option
of converting their holdings into equity shares. The rate of conversion and the period after which
the conversion will take effect are declared in the terms and conditions of the agreement of
debentures at the time of issue. On the contrary, non convertible debentures are simple
debentures with no such option of getting converted into equity. Their state will always remain of
a debt and will not become equity at any point of time.
Fully and Partly Convertible Debentures: Convertible Debentures are further classified into
two Fully and Partly Convertible. Fully convertible debentures are completely converted into
equity whereas the partly convertible debentures have two parts. Convertible part is converted
into equity as per agreed rate of exchange based on agreement. Non convertible part becomes as
good as redeemable debenture which is repaid after the expiry of the agreed period.
Secured (Mortgage) and Unsecured (Naked) Debentures: Debentures are secured in two
ways. One when the debenture is secured by charge on some asset or set of assets which is
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known as secured or mortgage debenture and another when it is issued solely on the credibility
of the issuer is known as naked or unsecured debenture. A trustee is appointed for holding the
secured asset which is quite obvious as the title cannot be assigned to each and every debenture
holder.
First Mortgaged and Second Mortgaged Debentures: Secured / Mortgaged debentures are
further classified into two types first and second mortgaged debentures. There is no restriction
on issuing different types of debentures provided there is clarity on claims of those debenture
holders on the profits and assets of the company at the time of liquidation. First mortgaged
debentures have the first charge over the assets of the company whereas the second mortgage has
the secondary charge which means the realization from the assets will first fulfill obligation of
first mortgage debentures and then will do for second ones.
Registered Unregistered Debentures (Bearer) Debenture: In the case of registered debentures,
the name, address, and other holding details are registered with the issuing company and
whenever such debenture is transferred by the holder; it has to be informed to the issuing
company for updating in its records. Otherwise the interest and principal will go the previous
holder because company will pay to the one who is registered. Whereas, the unregistered
commonly known as bearer debenture. can be transferred by mere delivery to the new holder.
They are considered as good as currency notes due to their easy transferability. The interest and
principal is paid to the person who produces the coupons, which are attached to the debenture
certificate. and the certificate respectively.
Fixed and Floating Rate Debentures: Fixed rate debentures have fixed interest rate over the
life of the debentures. Contrarily, the floating rate debentures have floating rate of interest which
is dependent on some benchmark rate say LIBOR etc.
Zero Coupon and Specific Rate Debentures: Zero coupon debentures do not carry any coupon
rate or we can say that there is zero coupon rate. The debenture holder will not get any interest
on these types of debentures. Need not to get surprised, for compensating against no interest,
companies issue them at a discounted price which is very less compared to the face value of it.
The implicit interest or benefit is the difference between the issue price and the face value of that
debenture. These are also known as Deep Discount Bonds .All other debentures with specified
rate of interest are specific rate debentures which are just like a normal debenture.
Secured Premium Notes / Debentures: These are secured debentures which are redeemed at a
premium over the face value of the debentures. They are similar to zero coupon bonds. The only
difference is that the discount and premium. Zero coupon bonds are issued at discount and
redeemed at par whereas the secured premium notes are issued at par and redeemed at premium.

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Callable and Put Debentures / Bonds: Callable debentures have an option for the company to
buyback and repay to the investors whereas in case of put debentures, the option lies with the
investors. Put debenture holders can ask the company to redeem their debenture and ask for
principal repayment.
Equity warrants: Warrant is a security that gives the warrant holder the right to purchase equity
at a specific price, within a certain time frame. Without the warrants, the investor or lender
would only receive the dividend yield or interest rate on his shares or loan, hardly compensating
him for the risk of making the investment. This equity-kicker is what gets investors excited.
Warrants are usually expressed as a percentage of the "fully-diluted" common stock of the
company, which then equates to a certain number of common equity shares.
Deep Discount Bonds: A deep discount bond is a type of bond that is sold at a much lower price
than the par value. Since it is sold at a discount, its coupon rate is also considerably lower than
the rates of fixed-income securities, even if their risk profiles happen to be similar. Usually,
though, deep-discount bonds are seen to carry greater risk than similar bonds. On the other hand,
these are usually long-term bonds which attract investors because there is a minimal risk that
these will be called before the time of maturity. Deep discount bonds may sometimes be referred
to as zero-coupon bonds.10
Zero-coupon bonds, however, do not have coupons at all. This simply means that periodic
interest payments are not available under the provisions of this type of bond. The compounded
interest is paid in full at the time of maturity. In addition to this, the difference between the bond
price and the redemption value is included in the computation. Zero-coupon bonds may either be
long or short-term investments. Long-term bonds mature after ten to fifteen years, while shortterm bonds mature in less than a year. Such short-term bonds are known as bills. U.S. Treasury
bills and savings bonds are some examples of zero-coupon bonds.
Regular bonds, on the other hand, provide investors with regular income which comes in the
form of coupon payments. Such payments are usually available on a semi-annual basis. The
principal amount is then paid to the investor at the time of maturity.
Inflation Adjusted Bonds: These funds own Treasury Inflation Protected SecuritiesTreasury
bonds and notes whose principal and coupon payments step up with the cost of living. That just
about eliminates inflation risk. In other words these are the bonds on which both interest and
principal are adjusted in line with the price level changes or the inflation rate.
Floating Rate Notes: Bond whose interest fluctuates in step with the market interest rates
payable on the guilt edged securities.
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SECURED PREMIUM NOTES

What is a secured premium note (SPN)?

A secured premium note is a kind of debenture and an effective method to raise money from the
capital market. A secured premium note or SPN comes with a notice period of four to seven
years and it is redeemable at premium after the notice period. It carries with it the feature of a
warrant which entitles the holder to apply for equity shares provided that the SPN is fully paid.
However, there is a stipulated period of time within which when the holder can apply for equity
shares and has to be initiated within the mentioned time.
There is a minimum time frame which is attached to this instrument called the lock-in period
during which no interest/premium is paid if SPNs are redeemed. Thus, a holder of this
instrument has an option to redeem it at par value once the lock-in period is over.
The structure of this instrument can be explained with the example of TISCO, when it issued
SPNs in 1992 to raise money from the capital market. The company issued 11550000 SPNs
which had a face value of 300 each for 4 to 7 years. TISCO did not pay any interest for the first 3
years but a fixed amount of Rs 75 was paid from the end of 4 th year onwards which was the
repayment of principal and along with it an additional Rs 75 was paid which was the
interest/premium. Warrants were issued to the holders of this instrument where a fully paid up
equity share having a face value of 100 each could be bought. The time frame within which it
could be undertaken was 1.5 years from the date of allotment. Thus, the lock-in period in this
case was 4 years as no interest was paid during that tenure.11

The few important characteristics of this instrument are as follows:

Only listed companies can issue secured premium notes

A company issuing this instrument needs to get an approval from the central
government and only then it can proceed.
A SPN which comes with a warrant is detachable which means it may be sold as a
different instrument and hold no connection with what it originally was.
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 The time limit within which the conversion can be made has to be specified by the
company.
A secured premium note is a combination of debt and equity which makes it a hybrid
security.
The lock-in period attached to these instruments can be from 4 to 7 years i.e. the time
during which the holder cannot redeem.12
The return derived from this instrument is classified under capital gain.
The holder is always repaid in equal instalments along with interest/premium after
the lock-in period.

Benefits of a secured premium note:

To investors
The investor receives
high rate of return. The
interest/premium
amount is usually high.

It gives the investor an

option to convert his SPN
into equity shares, thereby
becoming a shareholder.

The investor faces less tax

burden as it comes under
capital
gain
and
not
regular income.

Repayment is made in
instalments which again do
not pile up pressure on the
cash outflow of the
company

An effective way to raise

capital for projects by
requiring huge
investments.

To issuer
The issuer does not face
any cash crunch as there in
no fixed interest payment
during lock in period.

Risks associated with SPNs:

12

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 Although the repayment is made in instalments but the amount repaid as

interest/premium is very high and thus, as a result, the overall cash outflow of the
company is also high.
There are possibilities where the investor may fail to pay the lump sum amount.
If the SPNs are not fully paid the holder of the instrument faces the risk of converting
SPNs into shares. 13

13

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CONCLUSION
To meet its long term and short term needs of finance, a company may issue various kinds of
securities to raise funds from public. A company may decide to issue securities because it needs
start up capital or to repay debts or even to expand. It may also need an infusion of new
management ideas and know-how. These can be had by a wider ownership base. 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.
One such financial instrument through which a company can raise capital is secured premium
note. The below articles decode what are secured premium notes.
SPN and lock-in-period
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.
Thus, SPNs are nothing but a share warrant which are only issued by the listed companies after
getting the approval from the central government. SPN is a hybrid security i.e. it combines both
features of equity and debt products.
Features of a SPN

SPN instruments are issued with a detachable warrant.

These instruments have lock-in-period for 4 to 7 years.

No interest is paid during the lock in period.

After the lock-in-period, the holder may sell back the SPN to the company.

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
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that the return on investment was treated as capital gain and not regular income.
Consequently, the rate of tax applicable was lower.
TISCO (Tata Iron and Steel Company) took the lead in July, 1992 by making a mega
rights issue of equity shares and secured premium notes aggregating to Rs. 1,212 crore.

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BIBLIOGRAPHY
Statutes:

Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.

Books:

Baid Rachana , Mutual Funds Products and Services, Taxmann Publications, New Delhi,

2007.
Shekhar K, Guide To SEBI Capital Issues Debentures And Listing, 3 rd ed, Wadhwa and

Company Nagpur, New Delhi 2003.

Taxmanns SEBI Manual, 14th ed., Taxmann Publication, New Delhi, 2009.
Tripathy Nalini Prava, Mutual Funds in India: Emerging Issues, Excel Books, New Delhi,
2010.

Websites:

http://business.mapsofindia.com/finance/top-asset-management-companies.html.

https://www.imf.org/external/pubs/ft/pdp/2004/pdp03.pdf.

http://www.investopedia.com/terms/a/asset_management_company.asp.

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