Steel Majors

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MajoA review of financing instruments by Steel majors: Innovations
Tata Steel
2011
In March 2011, Tata Steel became the first company to issue Perpetual bonds (Perps) in India. A Perp has no maturity date. The investor gets income from the bond forever. The company, however, has a Call option after the end of the 10th year. The company can therefore, pay off the bond holders and extinguish the bond. The investor cannot redeem the bond ever, but can trade the bond in the secondary market. The coupon rate for the first 10 years is 11.8 percent, paid semi-annually. From the 11th year the coupon rate will be stepped up to 14.80. The coupon rate will be capped at 14.80%.
The promoter stake in the company had been diluted by 2.4% in the FPO of January 2011(described below). This is cited as a reason why the company chose to issue bonds rather than equity. Similarly, taking on more debt would have negatively affected its Debt Equity ratios.
The company intends to include the instrument as a separate class of capital under schedule 6 of Indian GAAP. This will not increase the interest burden of the company since the interest as and when paid will be recorded as a change in equity on its balance sheet. It can be counted as debt for tax purposes and as equity for ratings.
The cost of capital through this instrument is also lower. Cost of equity for markets such as India is 16-24% and cost of debt is around…...

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