What Are Secured Premium Notes?

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 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.