## Other Sources of Financing

### 1. Public Deposits

Short-term and medium-term finance source for companies
Especially used during RBI credit squeeze periods
Maximum limit: Up to 35% of paid-up capital + free reserves
Tenure: Minimum 6 months, Maximum 3 years
Unsecured — no collateral is provided
Should NOT be used for acquiring fixed assets (meant for working capital)

### 2. Seed Capital Assistance

Provided by IDBI for technically qualified entrepreneurs
Applicable only to projects eligible for IDBI funding
Interest-free but carries 1% service charge for 5 years
Repayment linked to the project's actual cash flow, after an initial moratorium

### 3. Internal Cash Accruals

Accumulated profits and reserves reinvested in the business
Used by existing profit-making companies
Eliminates need for external borrowing — no flotation or interest costs

### 4. Unsecured Loans from Promoters

Provided by promoters, not external lenders
Subordinate to institutional loans (repaid only after institutional loans are cleared)
Interest rate ≤ institutional rates
Treated as quasi-equity for debt-equity ratio calculation

### 5. Deferred Payment Guarantee

Supplier of machinery allows payment spread over time
Bank provides a guarantee to the supplier (bank doesn't lend directly)
Entire asset cost is financed through deferred payment
Suitable only for existing profitable units (no moratorium available)

### 6. Capital Incentives

Given to projects in backward/underdeveloped areas
Types: Cash subsidies, Sales tax exemption/deferment, Octroi exemption
Treated as long-term finance; but project must be viable even without the incentive

---

### Special Bond Instruments — Summary Table

Instrument	Key Features
Deep Discount Bond	Zero interest; sold at deep discount; face value paid at maturity
Secured Premium Notes (SPN)	Issued with detachable warrants; redeemable in 4–7 years; warrants convert to equity; no interest in lock-in period
ZIFCD (Zero Interest Fully Convertible Debentures)	No interest; fully converted into equity after a fixed period
Zero Coupon Bond	Issued at discount; no periodic interest; return = face value minus issue price
Option Bond	May be cumulative or non-cumulative; often issued with redemption premium
Inflation Bond	Interest linked to inflation rate; protects investor's real return
Floating Rate Bond	Interest rate floats with market conditions; issued by institutions like IDBI, ICICI
High Yield (Junk) Bond	Rated below investment grade; offers high returns due to high default risk

---

> Pattern to remember special bonds:

> - Zero in name = no periodic payment (Deep Discount, Zero Coupon, ZIFCD)

> - Floating/Inflation = variable return benchmarked to a market rate

> - SPN = unique structure with detachable warrants + no interest in lock-in

> - Junk = high risk, high reward, below investment grade

Worked example

### Example 1

A company issues Deep Discount Bonds with face value ₹1,00,000 at an issue price of ₹25,000 with 20-year maturity. No interest is paid during 20 years. At maturity, the investor receives ₹1,00,000. Return = ₹75,000 over 20 years. This is the investor's only return — entirely from capital appreciation.

### Example 2

A startup takes Seed Capital Assistance from IDBI for ₹10 lakh. No interest is charged, but a 1% service charge applies for 5 years (₹10,000/year). After a 3-year moratorium, repayment begins based on the project's cash flows — in good years, more is repaid; in lean years, less. This protects the entrepreneur's early-stage viability.

### Example 3

XYZ Ltd accepts public deposits of ₹50 crore (within 35% of its ₹200 crore paid-up capital + reserves). These are accepted for 2-year tenure at 9% interest. Since these are unsecured, investors bear risk. The company uses the funds for working capital — not for buying fixed assets, which would be inappropriate use of public deposits.

⚠️ Common exam mistakes

Confusing Zero Coupon Bond with Deep Discount Bond — both have no periodic interest, but the exam treats them separately: Deep Discount Bond specifically emphasizes the large gap between issue price and face value, while Zero Coupon explicitly highlights no coupon/interest payment.
Stating SPNs pay interest throughout — SPNs have NO interest during the lock-in period; interest (or equity conversion via warrants) kicks in only after the lock-in.
Confusing ZIFCD with SPN — ZIFCDs are fully convertible to equity (no redemption cash option); SPNs are redeemable in cash but also carry detachable equity warrants.
Stating public deposits can be used for fixed asset purchase — RBI guidelines explicitly state public deposits should NOT be used for acquiring fixed assets.
Forgetting that unsecured loans from promoters are treated as quasi-equity — this matters for computing the debt-equity ratio, a key metric for institutional lenders.

Reference:

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Other Special Sources — Public Deposits, Seed Capital, Internal Accruals, and Special Bond Instruments (Deep Discount, SPN, ZIFCD, Zero Coupon, Junk Bonds)

Worked example

⚠️ Common exam mistakes