## Hybrid & Innovative Sources of Finance

### 1. Seed Capital Assistance

Provided by IDBI for technically qualified entrepreneurs
Only for projects eligible for IDBI funding
Interest-free but 1% service charge for 5 years
Repaid based on project cash flow after initial moratorium

### 2. Internal Cash Accruals

Accumulated profits/reserves reinvested in business
Used by existing profit-making companies
Funds capex without external borrowing

### 3. Unsecured Loans (from Promoters)

Subordinate to institutional loans (repaid only after institutional loans)
Interest ≤ institutional rates, paid only after meeting other obligations
Treated as quasi-equity for debt-equity ratio purposes

### 4. Deferred Payment Guarantee

Supplier allows payment for machinery over time
Bank provides guarantee to the supplier
Entire asset cost is financed
Only for existing profitable units (no repayment moratorium available)

### 5. Capital Incentives

Given to projects in backward areas
Types: Subsidies (lump sum), Exemption/deferment of sales tax, octroi
Treated as long-term finance, but project must be viable without the incentive

### Summary of Innovative Bond Types

Bond	Core Feature
Deep Discount Bond	Zero-interest; sold at deep discount; face value paid at maturity
Secured Premium Notes (SPNs)	Issued with detachable warrants; no interest in lock-in period (4–7 years); warrants convert to equity
ZIFCDs (Zero Interest Fully Convertible Debentures)	No interest; fully converted into equity after fixed period
Zero Coupon Bond	Issued at discount; return = difference between issue price and face value
Option Bonds	May be cumulative or non-cumulative; often issued with redemption premium
Inflation Bond	Interest linked to inflation rate; provides real return protection
Floating Rate Bond	Interest floats with market; issued by institutions like IDBI, ICICI
High Yield / Junk Bond	Below investment grade; high return due to high default risk

Worked example

### Example 1

IDBI issues a Deep Discount Bond with face value ₹1,00,000 at an issue price of ₹20,000 for a 15-year term. The investor pays ₹20,000 today and receives ₹1,00,000 at maturity — no periodic interest. The ₹80,000 gain is the return.

### Example 2

A company issues SPNs with detachable warrants. During the 5-year lock-in period, no interest is paid to the holder. After 5 years, the warrant holder can convert to equity shares at a notified price. Investors who prefer cash redemption receive principal back.

### Example 3

A promoter gives an unsecured loan of ₹50 lakh to their own company. A bank lends ₹2 crore. The promoter's loan is treated as quasi-equity — improving the debt-equity ratio — and can only be repaid after the bank loan is fully settled.

⚠️ Common exam mistakes

Confusing Zero Coupon Bonds with Deep Discount Bonds — both are issued at discount, but Zero Coupon Bonds emphasize the absence of periodic coupons; Deep Discount Bonds emphasize the large discount.
Thinking Floating Rate Bonds protect against rising rates from the issuer's perspective — floating rate bonds shift interest rate risk to the issuer (cost rises with rates).
Assuming junk bonds are illegal or fraudulent — they are legitimate high-risk, high-return instruments rated below investment grade.
Treating deferred payment guarantee as a subsidy — it is a guarantee provided by a bank for installment payments to a machinery supplier; it must be repaid.

Reference:

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →

Hybrid & Innovative Sources of Finance – SPNs, ZIFCDs, Junk Bonds, Inflation Bonds

Worked example

⚠️ Common exam mistakes