Sample some of the more exotic amalgams that have successfully raised funds from the market. A Convertible Discounted Debenture combines the features of a deep discount bond with equity. That mix enables cash outgo in the initial years to drop to zero--a useful attribute for any infrastructure project. The Rs 113-crore Max India used exactly this combination to raise Rs 100 crore in September, 1997, for its telecom subsidiary, Max Telecom Venture. Observes Vivek Jetley, 38, group vice-president (finance), Max India: "Instead of a charge on plant or machinery, investors are being offered the security of a share of Max Telecom at a remunerative price."

Similarly, a Secured Premium Bond fuses together a zero coupon bond, a put option, and equity. The zero coupon bond ensures that there is no cash outflow during the first couple of years, but the put options provide the investor with an early exit route. Typically, the exercise price of the option is specified as a discount to the average price of a share over, say, the past three months. If the option is out of money--exercise price exceeds current price--the investor will receive the difference in cash. Investors who do not exercise the early exit option can choose to convert, or redeem, the bond after a specified period of time. Again, the conversion premium will be linked to the average market price. For example, the Rs 245-crore Nahar Spinning raised Rs 105 crore on a rights basis through such secured premium bonds in 1996 to fund its Rs 200-crore acrylic fibre project.

And the Rs 55-crore Krishna Filaments--which raised Rs 53.52 crore to part-finance its Rs 184-crore expansion project--went a step further by adding another layer of options. The somewhat cumbersomely-named Optionally Fully Convertible Discounted Debenture offers investors the choice of conversion from a zero coupon bond to either equity or a non-convertible debenture (NCD). If the conversion option is out of money, the investor opting for conversion receives the difference in the form of a NCD.

Quasi-equity instruments can also be converted into full-fledged equity shares. That is precisely the objective of Redeemable Convertible Cumulative Preference Shares. At the end of the reference period, investors can either opt for the redemption of the preference shares at a premium, or for their conversion into equity. And the cumulation feature ensures that any unpaid dividends are carried forward, thus providing investors with a degree of security.

This burst of innovation will spill over to Euro-convertibles as well in future. The Rs 736-crore Gujarat Ambuja Cement's Foreign Currency Convertible Bond offered investors the choice of conversion to either the underlying domestic share or the GDR. One advantage of tapping markets with greater depth than the domestic market: strong balance-sheets can be more effectively leveraged to maximise conversion premia while simultaneously minimising the cost of debt. For instance, the FIIs lapped up M&M's $115-million convertible bond issue in 1996 despite a low 5 per cent coupon rate and a hefty conversion premium of 23 per cent over the underlying domestic share price.

Although a multiplicity of options may make convertibles more marketable, it also multiplies the uncertainty that must be managed by the CFO. The exercise of an early exit option en masse could throw a project off-track at the implementation stage. If time, and cost, over-runs disrupt the profitability projections, the share price will languish. Investors will choose not to exercise the conversion option and, instead, redeem the debt, vitiating a cash crunch. Warns H.R. Kapur, 39, financial controller, Nahar Spinning: "The benefit of a convertible bond hinges on a high share price at the time of conversion. If you're not sure about the project's profit potential, don't opt for convertibles."

LEASING. Surprisingly, one of the most flexible financial tools available to the CFO is the basic lease. While the process of obtaining sanctions for equipment finance from banks can consume upto six months, leasing companies can arrange the deal faster. And, depending on the project requirements, the distribution of payments across the life of the lease can be uniform, bell-shaped, or skewed. For large capital-intensive projects, a balloon-like lease structure would back-end rentals, minimising the cash outgo during the gestation period. No wonder that in the developed markets, leasing is a popular source of financing.

In the US, more equipment is financed by lease than by any other method of equipment financing. In India, however, the now-egregious leasing and hire purchase company has not made much of a dent in total capital formation: the proportion of leased assets to total assets (the penetration ratio) is a meagre 5 to 6 per cent as compared to a global average of 21 per cent. The numbers are low because leasing in this country is first a tax-trading device and next, a financing device. Not surprisingly, the size of the average lease deal is small, ranging between Rs 3 crore and 5 crore.

These traditional patterns are set to change. First, the imposition of the Minimum Alternative Tax, coupled with a dramatic drop in corporate tax rates from 43 to 35 per cent, has reduced the value of tax trading. Second, and more important, Non Banking Finance Companies (NBFCs) are now permitted to write joint leases and claim depreciation cover in proportion to their exposure. Large pools of assets, and even entire plants, can be lease-financed through what is aptly known as big-ticket leasing. Predicts R. Shankar Raman, 39, senior vice-president, L&T Finance: "Leasing will emerge as a major project financing option. Its tax benefits will become secondary."

As leasing increases its share in the financing pie, expect operating leases to proliferate. At present, financial leasing accounts for the bulk of leasing activity. Specifically, a financial lease is a long-term non-cancellable lease, requiring the lessee (the user of the equipment) to pay the maintenance costs. An operating lease, on the other hand, is a short-term contract, the duration of which is less than the life of the equipment. So, the lessor (the owner of the equipment) pays the maintenance costs, and assumes the equipment risk. That can be a boon for CFOs who have to contend with a high rate of technological obsolescence on their equipment. Concurs Mohandas Pai, 37, the senior vice-president (finance) of Infosys Technologies: "An operating lease is, certainly, a convenient way of financing the constant upgrading required for infotech equipment."

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