AN ANALAYSIS OF INNOVATIVE INSTRUMENTS OF RAISING FINANCE BY LISTED INDIAN COMPANY

AN ANALAYSIS OF INNOVATIVE INSTRUMENTS OF RAISING FINANCE BY LISTED INDIAN COMPANY

Companies have been using various financial instruments to raising required capital for achievement of their broad corporative objectives. The innovative instruments have the potential to help Indian companies to overcome the severe financing constraints they have been experiencing over a long period of time. Companies are doing every thing to tap available financial resources through the use of old and innovative instruments and the process will continue indefinetly.Companies in their pursuit of reducing the cost of capital, put a premium on such instrument which will help in achieving such an objectives.

A financial instrument is a combination of characteristics such as promised yield liquidity, maturity, security and risk. The process of financial innovation involves creating new instruments and technique by unpackaging and rebinding the same characteristics in different fashion to suit the constantly changing the needs of the issues and the investor’s .These innovative are of two kinds:-

1 Changes aimed at the tax planning.

2 Adaptive changes that give rise to a gap in the range of available financial instruments.

In corporate finance, financial engineers are often called upon to develop innovative instruments are secure the funds necessary for operation of large scale business. The nature of financing required cost preference and other consideration indicate special instruments, a collection of special features to be attached to an instrument or a combination of instruments to be used in concert. At times it precipitates in the introduction of revolutionary new products such as swap, mortgage, and zero coupon bonds to finance leveraged buyouts. This is the kind of creativity involved in the extension of future trading to a commodity or a financial instrument not previously traded in a futures pit, the introduction of swap variants or the creation of mutual fund with a new focus. At tills other times it involves the piecing together of existing products and process to fit in a particular set of circumstances.

Financial innovation has therefore been a continuous and integral part of corporate world. Greater freedom and flexibility have thus enabled companies to invent and innovate financial instrument and their subsequent introduction. A variety of factors such as increased interest rate, volatility, frequency of tax and regulatory changes etc have stimulated the process of financial innovations. The deregulation of financial service industry and increased competition with in investment banking undoubtedly led to increased emphasis on the ability to design new products , develop better process, and implement more effective solution for increasingly complex financial problems.  Financial engineering has thus become the life blood of this activity.  According to Thone Finerty F.E involves the design, the development, and the formation of creative solutions to problems in finance.  Financial innovations have been a continuous and integral part of the corporate world.

Such innovations could prove extremely beneficial by adding value to the company if it.

  1. Re allocates Risk form those who are less willing to bear it to those who are more willing to assure it.
  2. Enhance liquidity.
  3. Diminishes agency costs emanating form the conflict between share holders, managers and creditors.
  4. Lowers the combined burden of tax to the issuer and the investor.
  5. By passers ingeniously some regulatory restrictions.

New financial Instruments in the capital Market

With the evolution of capital market new financial instruments are being introduced to suit the requirements of the companies.  Keeping in view the yield expected by investors, price and credit risk, liquidity and quantum of funds etc. some of the new financial instruments are Zero coupon bonds, warrants, (detachable warrants secured premium Notes, Stock invest, Bond with floating interest rate, Deep discount bonds, option bonds, option, swap financial engineering made first appearance in the finance literature in 1987-88. Thon Finnerty „Financial Engineering in Corporate finance An Overview 1988 pp 4-3)

Financing Instruments Issued by Indian company

After the liberalization measures were announced in 1991, Indian Company under took issuance of new instruments seriously in order to attract large section of investors.  Essar Steel used convertible debentures with warrants and loyalty coupons, Tata Iron and Steel Company Limited issued secured Premium Notes with warrants, Flex Industries  issued partly convertible debentures and non convertible debentures with warrant attached to each instrument DLF aments issued multiple option bonds, Essar oil issued optionally fully convertible debentures and Reliance Petroleum issued triple option convertible with equity warrant and Esab India issued partly convertible debenture.

This burst of innovation has seen a typical shift in the design and development of new instrument.  The classic conversion is that of debt in to equity.  Offering the investor the option of conversion keeps the cost of his convertible debt lower than straight debt, thus minimizing the cash out flows during the gestation period.  Once the project yields steady profits, the equity conversion results in a relatively- expensive dilution.  The use of fectures like warrants makes the equity and convertible less expensive for the investor.  It creates possibilities for their full subscription by the investors and also turns out to be cheaper for the issuing company.

Nature of Problem

Over the years, Indian Companies have worked in a restrictive and controlled regime where high cost of capital, limited flexibility. Low capacity to raise adequate finances, lower production capacities, obsolete technologies, low auto motion, high product prices, etc. Introduction of new instruments of finances have provided opportunities to Indian Companies to design instruments which could give them the freedom to address to the varying needs of investors group to make an attempt to lower the cost of capital.  Introduction of new financing increased the chances for more and more investor’s participation in future offerings of companies.  This may enhance the chances for raising more and more funds.  It is not clearly known as to what benefits the introduction of such new instruments brings to the companies and the investors and what perceptions investors as well as managements have with regard to these new instruments.

Investments in companies were a risky proposition low returns on equity and availability of limited options due to existence of limited number of instruments were common.  The changed scenario promises to be panacea for all the deficiencies of the past.  It will therefore, be prudent to analysis how the process of financial innovation has helped to accelerate those of new instruments by Indian companies.

Objectives of Study

Keeping the nature of problem  in mind an attempt was made to analyze the effects of introduction of new instruments of finance on cost of capital, profitability, expansion, diversification / modernization programmes of various companies, competitiveness, product quality, investors etc, the detailed analysis will provide an insight into above mentioned areas and helps to find out whether introduction of new instruments of finance will help in solving the problems faced by the Indian Companies.  Further analysis will also throw some light on the acceptability of these instruments by the investors which will greatly help the Indian companies to overcome the shortage of funds.

The specific objectives of the study are

  • To study the regulations and development of financial instruments in India.
  • To analyze different aspects of new instruments of finance.
  • To analyze the effects of introduction of new instrument of finances in capital structure.
  • To analyze the investors, managements and brokers perception regarding the use of new instruments of finance
  • To ascertain whether there is any further scope for designing newer instruments of finances.

Hypotheses

The present study among other things to include the following hypotheses for testing

  • The level of income and state of investment is independent of each other.
  • New and traditional instruments of finance have provided similar investment choices to investors.
  • New and traditional instruments of financing have provided similar benefits to the investors.
  • No further innovations are needed in various instrument of financing.
  • Investors with positive perception about using of innovative features favor continued use of such features in new instruments of finances.

Research Methodology

The study is based on data collected by both primary as well as secondary sources.  Annual report, research articles, published in various books and journals on different aspect of the problem under study have served as a major source of secondary data. Apart form discussion with various investors, company official and other classes of respondents properly designed comprehensive questionnaires constituted the primary source of data.

The selection of companies included in this study was based the following criterion.

  1. Companies which have entered the capital market funds and have made use of new and traditional instrument of finance after 1990- 91.
  2. Companies which are in the market for at least 3 years.  An effort was made to select at least one company form each industry.

The conclusion and inferences were based on statistical tests such as chi-square test and Likert’s summated technique etc.

Reference:

  1. Asquith Paul and David W Mullin, Equity Issues and offering Dilution Journal of financial Economics January / February 1986 pp 61-89.
  2. Chew. Donald H. In the Revolution In corporate finance edited by Joel M Stern and Doneld H Chew 1992 Black Well Oxford.
  3. Finerty, John D. Financial Engineering in Corporate finance An Overview Financial Management winter 1988 (4-33).
  4. Gupta, Santhosh. Research Methodology and Statistical technique. New Delhi: Deep and deep Publications.
  5. Kothari, CR. Research Methodology. New Delhi: New Age International (p) Limited.
  6. Mishra. R.K. „Financial Instruments“ The Chartered Accountant September 1995 p.p (84-90)
  7. Prasana, Chandra. Financial Management Theory and Practice. Tata Mc Graw hill Ltd.
  8. Roju M, thiripal. Financial innovations in the Indian Capital Market during the last decade finance India, Vol No. 1, March 1993. p (43-62)
  9. Sharma. R.K and Shashik .K. Gupta, Financial Management Kalyan Publisher Ludhinana.

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Source by Nidheesh K B